How Sensitive Is Pfizer To R&D Expense Changes?
We estimate that Pfizer’s (NYSE:PFE) R&D expenses will grow in low single digits to $7.8 billion in 2018. However, we expect a slight decline in R&D expenditure as a percentage of Pfizer’s gross profit. Of late, many large pharmaceutical firms are becoming more financially disciplined in order to protect their earnings, which are under threat due to patent expiries for key drugs. Over the last few years, Pfizer has lost its patent exclusivity for some of its drugs, and it will lose patent exclusivity for Lyrica this year. Lyrica’s annual sales were over $5 billion in 2017. While Pfizer has a solid portfolio of new drugs, which will likely offset the revenue declines that are expected from the loss of patent exclusivity for drugs in the coming years, we expect the company to be prudent about its R&D spending. We have created an interactive dashboard analysis ~ How Sensitive Is Pfizer To R&D Expense Changes? Note that you can adjust the R&D drivers, and see the impact on Pfizer’s overall valuation and price estimate. Below are some of the charts and data from the interactive dashboard.
Expect R&D Expenses To Grow In Low Single Digits In 2018
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Pfizer’s R&D expenditures as a percentage of revenues have increased from around 17.0% in 2011 to around 18.5% in 2017. However, the figure has declined slightly over the last three years. We believe that R&D expenditure as a percentage of revenues will come back to its historical average of less than 18% in the coming years. In 2018, we forecast the figure to be around 18.4%. Given that we forecast an increase in Pfizer’s overall revenues for 2018, led by its Oncology segment, this should translate into overall R&D expenditures of nearly $7.8 billion, reflecting a slight increase over the prior year.
Of late, several pharmaceutical companies, including Pfizer, have been focusing on a few specific therapeutic areas such as oncology. This is expected to streamline expenses and optimize R&D spending. However, developing and bringing a new drug to the market is a long process involving several phases including identifying the compound and clinical trials, which is costly and can last for several years. With many drugs, such as Lyrica, Xeljanz, and Sutent facing patent expiry over the next few years, Pfizer has been investing prudently to grow its pharmaceutical pipeline, and this trend is likely to continue, at least in the near term. The company has around 7 new drugs under its phase 3 pipeline, including Dacomitinib, Talazoparib, Tanezumbab, and Rivipansel. The company is also testing some biosimilars for existing drugs. This could result in higher R&D spending as well. A 2.5% increase in R&D expenditures as a percentage of gross profit would translate into an approximately 5% decline in Pfizer’s valuation and stock price estimate, as shown in the scenario on our interactive dashboard analysis.