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Its Powerful Pipeline Shows Pfizer Stock Is Undervalued by 15%

On the surface, Pfizer (NYSE:PFE) is running its business as usual. It has a few drug applications filed with the U.S. Food and Drug Administration. And although the stock has traded in a wild range in 2020 — between $32.53 and $40 — investors might be getting impatient holding Pfizer stock.

Here's How Pfizer Stock (and Pharma) Stand to Benefit From Mylan Deal

Source: Manuel Esteban /

Yes, the stock generates decent income with a yield near 4.3%. But right now, investors are favoring other stocks in the drug sector.

Typically, investing in the drug manufacturing space is attractive if the business is growing and the stock trends higher. So, Pfizer may need bigger catalysts to lift its quarterly results.

New Products Could Lift Pfizer Stock

The FDA recently approved Pfizer’s application for a new combination Advil Dual Action drug. The pain medication combines Advil (ibuprofen) with acetaminophen. This combination drug is designed to treat minor aches including headaches, muscle pain and backaches. At a practical level, the combination should give sufferers an effective treatment. Research studies showed that the pair may work better than many opioid medications.

In February the European Commission approved Pfizer’s Vyndaqel drug, which treats transthyretin amyloid cardiomyopathy (ATTR-CM). Paul Levesque, the global president of Pfizer’s rare diseases unit, said at the time that “Until today, there were no approved medicines to treat patients with ATTR-CM in the EU. Today’s approval represents incredible progress for these patients and reflects our steadfast commitment to delivering breakthrough medicines to rare disease patients.”

The markets are not giving Pfizer’s growing pipeline much of a premium. Pfizer stock trades at a forward price-earnings ratio of 13.2.

Revenue and Guidance

In the fourth quarter, Pfizer reported revenue declining 8% to $12.7 billion. For 2019, revenue fell 1% operationally to $51.8 billion. Digging into the details, its biopharma revenue grew 8% for the year. Ibrance revenue rose 23% operationally to $5 billion while Eliquis revenue increased 26% to $4.2 billion.

For 2020, Pfizer anticipates as many as 15 proof of concept study readouts. Some of the key potential growth areas are in gene therapy. Also, Pfizer has clinical results on the way from its early breast cancer study and its Abrocitinib drug for treating atopic dermatitis.

In reality, Pfizer’s atopic dermatitis products are unlikely to take much market share. Regeneron’s (NASDAQ:REGN) Dupixent is a leading biologic in this space. XBiotech (NASDAQ:XBIT) also licensed one of its novel antibodies to Janssen Pharmaceutical, a division of Johnson & Johnson (NYSE:JNJ).

Pfizer forecast revenue in the range of $48.5 billion to $50.5 billion. Earnings per share will come in the range of $2.82 to $2.92. At around 13 times forward earnings, the stock is modestly priced. Besides, the forecast is respectable despite the company anticipating a $2.4 billion loss as it loses some drug exclusivity.

Management continues to reward income investors by allocating its capital to increase the dividend. It balances the cash flow to also invest back into the business. For example, its operating expenditures will include modernizing its facilities.

To simplify its structure, Pfizer will spin out its off-patent drug business and combine it with Mylan (NASDAQ:MYL). The deal will involve a $12 billion debt issuance, which Pfizer will then use to pay down its debt. Investors should take notice of Mylan’s underperformance. Markets interpret Pfizer as coming out ahead while Mylan holds a portfolio of generic drugs facing price erosion.

Valuations on Pfizer Stock

Pfizer stock is trading at a discount of at least 15%. For example, investors may use a 5-year discounted cash flow revenue exit model. In it, assume revenue falls for the next two years. If the company grows from years three to five, then the stock is worth almost $40:

Metrics Range Conclusion
Discount Rate 8%-9% 8.5%
Terminal Revenue Multiple 4.1x-5.1x 4.6x
Fair Value $35.63-$43.59 $39.53

Data courtesy of (click on the link to change assumptions)

Pfizer is a good company that investors should buy and hold for the long term. If the stock drifts lower, use the opportunity to average down on the stock.

Chris Lau is a contributing author for and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold any of the aforementioned securities. 

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