Roche’s ADR (OTCMKTS: RHHBY) has gained over 20% since the March 23 lows of this year, while Pfizer (NYSE:PFE) stock has fared much better and gained 35% of its value. The lockdown in various parts of the world has had a negative impact on the pharmaceuticals industry worldwide due to deferment of elective surgeries and fewer hospital visits resulting in lower number of prescriptions being issued. However, we believe Pfizer will likely fare better than Roche because of its valuation and its restructuring initiatives. Specifically, Pfizer has spun-off its low-margin consumer healthcare business, and it is currently in the process to spin-off its established drugs business. These initiatives will likely aid Pfizer’s margins over the coming years.
Our conclusion is based on our detailed dashboard analysis, ‘Roche looks expensive compared to Pfizer‘, wherein we compare trends in key metrics for the two pharmaceutical giants over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.
Why Has Pfizer Outperformed Roche Over Recent Weeks?
Pfizer’s PE based on 2019 earnings has remained around 13x at the end of 2019, and currently, while Roche’s multiple has increased from 16x to about 17x. The gains in Roche’s multiple can be attributed to its relatively newer drugs performing well in the first half of 2020. Also, Roche’s Covid-19 test was approved early in March, and it more than offset the decline from other tests due to lower volume in the first half of the year.
However, Roche’s multiple still appears high, considering that the company’s revenues and margins are also at risk compared to Pfizer. Notably, Pfizer’s PE is around the mid-point of the range seen over the recent years, and it is 7% below the figure at the end of 2018. On the other hand, Roche’s PE is 25% higher than the level seen at the end of 2018 – indicating that the market hasn’t quite priced in the negative impact of weaker revenues and margins on the company’s stock. This leads us to believe that Roche’s stock could be vulnerable.
The outperformance of Pfizer stock over the recent weeks can be attributed to its vaccine for Covid-19 entering phase 3 trials, which could involve up to 30,000 participants. Pfizer’s vast resources, better access to manufacturing, and distribution could give it an edge over some of the other companies, such as Moderna, who are also working on development of a vaccine, as it continues to move forward. Also, the restructuring around consumer healthcare and established drugs businesses at Pfizer will allow the company to focus on the high growth Biopharma segment, which includes oncology drugs, such as Ibrance, vaccines, such as Prevnar, and Pfizer’s newly approved biosimilars for some of the blockbuster drugs, including Humira and Avastin.
But How Long Before The Economy Recovers And Pfizer Stock Gains?
- The expected timeline for recovery in global economic conditions, and further rally in Pfizer’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
- Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Pfizer’s multinational peers, including Johnson & Johnson and Merck. The complete set of coronavirus impact and timing analyses is available here.
- There are signs of recovery in demand for most sectors already in Q3, with gradual lifting of lockdowns and a gradual rise in number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers. In fact, elective surgeries which were deferred earlier in Q2 are now being attended to.
- Although most companies will report poor full year 2020 results, market expectations will be buoyed by a visible improvement in the situation on the ground.
Overall, we believe Pfizer’s stock price at levels of $38 provides a buying opportunity for investors willing to be patient.