A lot of stocks are rising because of efforts to find a cure or vaccine against COVID-19. Pfizer’s (NYSE:PFE) PFE stock should not be one of them.
That’s not to dismiss its efforts. Pfizer might win the race to get a vaccine out by fall. It’s a finalist in the competition to get something out by the end of the year. The company has also outsourced some drug production to focus on the vaccine.
But Pfizer is a huge company. Revenues in 2019 were $51.75 billion, and nearly $16.3 billion of that was net income. There’s a lot more to look at besides the vaccine, and a lot more to worry about.
Pfizer’s Problems
Pfizer is a no-growth company valued for its 38 cents per share dividend, which currently yields 4.2%. With 5.5 billion shares outstanding, it costs $8.36 billion to pay that dividend out over a year.
This means the dividend looks safe, which is why income investors should strongly consider it. But shares don’t reflect that safety. They’re now down 7.3% in 2020.
That’s because Pfizer’s generic Upjohn business is in the process of being spun out and merged with Mylan (NYSE:MYL). The consumer business was spun-out last year, joining that of GlaxoSmithKline (NYSE:GSK).
While the current company has plenty of income for the payout, cash flow projections show the main company’s dividend dropping 17%, to about 32 cents. That’s a yield of just 3.6% for PFE stock. The rest should come out from the spin-off, which is to be called Viatris. But that means your dividend depends on a second management team.
Many of the company’s best-known brands, like Lipitor, Celebrex, and Viagra, are going into the spin-off. Mylan managers who got the company into trouble in the first place are being retained.
Then there’s Pfizer itself. A Phase 3 study of its breast cancer drug palbociclib, sold as Ibrance, was halted as it became clear it wouldn’t meet its goals. The company’s epilepsy drug, Lyrica, is losing patent protection, and revenue could fall $2.8 billion over the next few years as a result.
Pfizer’s latest 8-K report from April shows Upjohn getting $8-$8.5 billion of revenue this year, against $40.7-$42.3 billion for the remaining company. The assumption of 12% growth for the new company is based on Eliquis, an anticoagulant, Vyndaqel and Vyndamax, which are heart drugs, and Ibrance.
Pfizer Cures
Concerns about the pipeline led Pfizer to put $500 million into other companies as a “Breakthrough Growth Initiative.” The idea is that by financing late-stage development of promising therapies, for a non-controlling interest, Pfizer can expand its pipeline at low cost.
Then there’s the vaccine, which it hopes to start testing on thousands of people by September. The company hopes for data on a smaller sample of patients as early as this month. The Pfizer candidate was co-developed with BioNTech (NASDAQ:BNTX), a German company.
The Bottom Line on PFE Stock
Pfizer has delivered shareholder returns of 30% over the last three years, combining dividends and the stock’s capital gains, despite declining revenue.
The spin-off of consumer health and generics means the company is more dependent on its branded drugs, and its pipeline, than ever before. Analysts at Trefis think the stock should be worth $46/share. Analysts at JPMorgan Chase (NYSE:JPM) disagree.
To fuel the bulls, Pfizer needs results in its research and must maintain high prices on the resulting drugs. That’s why the Ibrance news sent the stock down 8%, as it was about to get back to even on the year.
Buying Pfizer today is a bet on the future of research and patented medicines. If you think that future is bright, buy. If you’re worried about that business, don’t.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM.
