Pfizer: patent woes could mask a buying opportunity – Investors Chronicle

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  • Patent expirations are due in the middle of this decade, against a politically charged backdrop
  • Pfizer expects projects ‘durable demand’ for its Covid jabs and has been investing heavily in its broader pipeline

Tip style

Value

Risk rating

High

Timescale

Medium Term

Bull points

  • Revenues diversified across various pharma specialisms
  • High levels of R&D investment driving drug development
  • Covid-19 jab could see ‘durable demand’ beyond immediate crisis
  • Fund manager favourite

Bear points

  • Patent cliff on the horizon
  • Risk of political intervention in the pharma sector

In early May, a statement from Washington D.C. sent shockwaves through the pharmaceutical industry.

“The extraordinary circumstances of the Covid-19 pandemic call for extraordinary measures,” said US trade representative Katherine Tai, as she revealed that the Biden-Harris administration was in favour of waiving intellectual property (IP) rights for coronavirus vaccines.

The US announcement garnered praise from people and organisations across the globe, amid hopes that the erosion of patent barriers would allow for greater levels of vaccine production – helping poorer countries to access jabs for their citizens.

But the move also sparked an immediate backlash from pharma companies themselves, along with trade associations and investors. Such a step did not make sense, they argued, because a vaccine IP waiver would do little to ramp up the number of available shots while raw materials and scientific know-how were in limited supply.

At the same time, questions abounded about the broader implications of Biden’s decision. The threat of political intervention in the pharma sphere had loomed for years. But the President’s seeming willingness to unravel the web of patents safeguarding companies’ work could now signal the industry is actually going to experience more oversight and tighter price controls.

It doesn’t help Big Pharma that the pandemic has underlined the advantages of easy-access, affordable medicine. Indeed, for all its demonstration of the power of science, the crisis also shone a light on the benefits of unbranded, generic drugs.

All the while, the evolution of managed care in the US has long stoked competition in the medical sector. Almost 300m Americans now have some form of health insurance coverage. Managed care organisations have also consolidated into fewer, larger entities with greater negotiating influence. Their efforts to contain and reduce treatment costs have thus loaded more pressure onto drug prices.

Pfizer’s patent cliff

Against that politically charged backdrop, healthcare giant Pfizer’s (US:PFE) patent woes have been thrown into even starker relief. The New-York-listed group is due to face multiple IP expirations in the middle of the current decade, known collectively as a ‘patent cliff’.

Thus, despite Pfizer’s well-documented success in developing a Covid-19 vaccine with German company BioNTech (US:BNTX), its share price has risen just 12 per cent in the past 12 months and 18 per cent in the past three years. Meanwhile, according to data provider Factset, only a fifth of surveyed analysts maintain a ‘buy’ rating on Pfizer, down from 53 per cent last May.

The challenges faced by Pfizer have arguably been over-baked into its current valuation as there are reasons to be optimistic about the company’s future. One reason, perhaps, why the stock has regularly featured in the IC’s list of healthcare fund managers favourite shares, which is updated once every seven weeks on our Ideas Farm pages.

The Covid-19 vaccine itself has generated significant sales for Pfizer in the space of just a few months and management believes that the world will still need repeat doses after the initial crisis period. Moreover, the new technology on which Pfizer’s jab is based – messenger RNA or ‘mRNA’ – has finally been legitimised by the pandemic. Now that it been rolled out widely, its other potential applications could theoretically change the face of medicine as we know it.

mRNA is just one of the areas on which Pfizer is betting as it continues to plough billions of dollars into research and development (R&D). If it pays off – and it’s a big ‘if’, because trials don’t guarantee positive results – such investment could bring considerable rewards to those willing to take a risk on the shares.

Track record and diversification

Pfizer was founded in 1849 by Charles Pfizer and his colleague Charles Erhart. The group has since developed into a pharma behemoth valued at more than $200bn with revenues exceeding $50bn every year between 2016 and 2019 – prior to Pfizer spinning off its ‘Upjohn’ business in 2020.

With such expansion has come international and product diversification. Notwithstanding its Brooklyn roots, Pfizer’s sales are now generated around the world. Just over half of group revenues stemmed from the US last year. China and Japan were the company’s next largest markets, each representing 6 per cent of the top line.

The modern-day Pfizer comprises six specialist areas. The largest business by sales, generating revenues of nearly $11bn, is oncology. The group’s other segments include internal medicine, hospital drugs, rare diseases, inflammation and immunology, and – of course – vaccines.

Each of these subsectors has its own unique market opportunity. As Investors’ Chronicle explored earlier this month, the immunology treatment universe alone is estimated to be worth $80bn.

Expirations loom, but R&D is ramping up

As things stand, two of Pfizer’s top medications are in the throes of patent expirations. Chantix – a prescription drug that helps people stop smoking and which generated sales of $919m in 2020 – saw its US patent expire last year, while the Europe equivalent expires in 2021. Cancer drug Sutent will expire this year in America and next year in Europe.

Looking ahead, cancer treatment Inlyta and immunology drug Xeljanz will expire in the US in 2025, while Eliquis and others will start to expire from 2026.

A number of Pfizer’s drugs are set to endure patent expirations
     
Drug US basis product patent expiration year Product revenue in 2020
Chantix 2020 $919m
Sutent 2021 $819m
Inlyta 2025 $787m
Xeljanz 2025 $2.4bn
Prevnar 13 2026 $5.9bn
Eliquis 2026 $4.9bn
Ibrance 2027 $5.4bn
Xtandi 2027 $1bn
     
Source: Company accounts (only selected drugs shown)

That said, with the benefit of foresight, Pfizer has whittled down its portfolio to become a more focused biopharmaceutical company. Its course has been charted since 2019 by the experienced hands of chief executive and long-time employee Albert Bourla.

The year that Bourla became boss, Pfizer formed a consumer healthcare joint venture with UK company GlaxoSmithKline (GSK) – spinning out its consumer division while retaining a stake of 32 per cent. In 2020, Pfizer completed the spin-off of Upjohn: its off-patent branded and generics business. Upjohn joined forces with generics company Mylan to form a new pharma company called Viatris.

Facilitating its push into pure biopharma, Pfizer has also invested huge amounts of cash into its pipeline. The group spent $9.4bn on R&D last year, equivalent to 22.4 per cent of sales. And its Covid jab with BioNTech is just one example of where such money is being put to good use. Indeed, as of 31 March 2021, Pfizer’s pipeline included 99 potential new therapies or drug indications. At an investor day last September, the group pointed to nine potential blockbuster drugs with total potential revenues of $15bn by 2025.

On the mRNA front alone, the group says that its emergence as a “leader in mRNA development” has allowed it to explore a range of opportunities including a potential flu mRNA programme. 

Topping expectations

In the here and now, recent trading has been strong. First-quarter revenues topped analysts’ expectations at $14.6bn, reflecting operational growth of 42 per cent. The group raised its full-year guidance from a range of $59.4bn-$61.4bn to a range of $70.5bn-$72.5bn – expecting Covid-19 jab revenues of $26bn, up from an earlier projection of $15bn.

But even without those jabs, Pfizer still posted 8 per cent growth and raised its non-Covid guidance range by $200m, “reflecting continued strong performance of the business”.

It is impossible to predict the course of Covid-19. But management believes its jabs will maintain importance. Bourla told analysts that he was looking ahead to “durable demand”, “similar to that of the flu vaccines”.

That anticipated demand, along with an emphasis on broader R&D development and pharma collaborations, should help Pfizer to weather the storm as it approaches its upcoming expirations. And while political risk is ever present, Bourla is one of various pharma chiefs to have warned of the perils of a patent-free world – noting that a crackdown on such protections could discourage biotech firms from spending on R&D.

Pfizer’s shares trade at just nine times projected earnings for 2022 – in line with peers Merck (US:MRK) and Amgen (US:AMGN), but cheaper than diversified healthcare behemoth Johnson & Johnson (US:JnJ). While 2022 is the expected peak for the vaccine bump, even in 2024 when Morgan Stanley predicts EPS will be down to 364¢ before edging up the following year, the shares are only priced at 11 times forecasts. The valuation appears to focus more on the patent plunge than the R&D potential.

Pfizer Inc. (PFE-US)        
ORD PRICE: 4,012ȼ MARKET VALUE: $223bn    
TOUCH: 4,005-4,019ȼ 12-MONTH HIGH: 4,308ȼ LOW: 2,994ȼ
FORWARD DIVIDEND YIELD: 4% FORWARD PE RATIO: 9    
NET ASSET VALUE: 1,231ȼ* NET DEBT: 38%    
Year to 31 Dec Turnover ($m) Pre-tax profit ($m)** Earnings per share (ȼ)** Dividend per share (ȼ)  
2020 53.6 20.7 292 136  
2019 51.7 19.7 295 144  
2020 47.5 17.7 270 152  
2021** 78.7 26.7 398 156  
2022** 79.2 28.7 424 160  
  +1 +7 +7 +3  
Beta: 0.5
*Includes intangible assets of $78bn, or 1,390ȼ a share
**Morgan Stanley forecasts, adjusted PTP and EPS figures  
 
 

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