Pfizer: A High-Yield Pharmaceutical Firm With Compelling Growth Drivers

| About: Pfizer Inc. (PFE)

Summary

Pfizer maintains an overall yield of 3.90%.

The company is in the midst of a new product cycle with several potential blockbuster drugs.

It has 94 clinical programs in progress, eight of which are on regulatory approval watch.

Pfizer (NYSE:PFE) was founded in 1849 and is headquartered in New York, New York. My positive investment thesis for Pfizer is based upon eight key criteria, which include:

  1. Large market capitalization
  2. Leadership position within an industry
  3. A strong balance sheet and solid operating cash flow
  4. A dividend above that of the S&P 500
  5. A strong commitment to dividend growth
  6. A strong balance sheet and high credit rating
  7. A low historical relative valuation as measured by price/sales and/or price/earnings ratios
  8. Key future growth elements that are in place

Capitalization

Pfizer is a large-cap drug manufacturer with a current market capitalization of $197 billion.

Leadership

It maintains a leadership position in the pharmaceutical industry. Pfizer is one of the world's largest pharmaceutical companies with revenue of over $50 billion per year. It has top products in the vaccine and cancer categories. Pfizer is a global firm, with sales outside the U.S. accounting for more than 50% of total revenue.

Balance Sheet and Credit Rating

The company's balance sheet is in excellent condition. Pfizer maintains a credit rating of AA from Standard & Poor's Ratings Services. Return on equity is at 9.5%. It has over $2 billion of cash on the balance sheet and maintains nearly $6 billion in operating cash flow

Relative Valuation Analysis and Price Projection

As for relative valuation, Pfizer has traded at a price/sales ratio range of 2.45-4.43 in the last decade. The average price/sales ratio for the last ten years has been 3.34.

Date

2016

Revenue

$mill

Net Revenue Per Share (expected)

8.85

Net Revenue Per Share

2015

48851

7.91

2014

49605

7.89

2013

51584

8.06

2012

58986

8.11

Table 1 Data Source: Pfizer Annual Report

Along with price/earnings, utilizing the price/sales ratio is an excellent measure of evaluating pharmaceutical firms. Revenue for Pfizer has stagnated over the last several years. However, my analysis of Pfizer indicates that key drugs in the cancer and vaccine divisions will drive sales growth out to 2022. At a price of $32.83, Pfizer stock currently trades at a price/sales ratio of 3.70. To predict a price for the stock utilizing relative valuation analysis, I assume that net revenue per share for Pfizer to conservatively grow at 5% through the year of 2022. This places net revenue per share at 10.6 by 2022. I expect the stock can trade at a price/sales ratio of just above the current rate (3.75) in 2022. A higher growth profile and substantial share buybacks should make this number easily achievable. Pfizer continues its long history of share repurchases. It completed a $5 billion accelerated share repurchase program in February. Shares outstanding have declined by 105 million shares versus the year-ago period. In fact, Pfizer's share count has declined to $6 billion today from $8 billion in 2010. Given the firm's commitment to buying back stock, I project shares will decline further to $5 billion by 2022, making my expected 10.6 sales per share projection even more viable. If Pfizer can generate my assumed 10.6 target and can trade at a multiple of 3.75 in 2022, my expected price target for the stock would be $39.75. This does not include dividends and reinvestment.

Dividends and Cumulative Return Projection

Pfizer has paid dividends since 1980. Dividends have escalated from $0.80 in 2011 to $1.28 a share today, an annual growth rate of nearly 8%. The current dividend yield stands at an attractive 3.9%. I expect the firm to maintain an 8% dividend growth rate in the next five years. With an assumed 8% growth rate, the company should pay the following yearly dividends out to 2021.

$1.38 - 2017

$1.49 - 2018

$1.61 - 2019

$1.74 - 2020

$1.88 - 2021

Table 2 Data Source: Pfizer Annual Report

Add the total dividends collected ($8.10) to my target price ($39.75), and an investor who purchased Pfizer today would potentially earn a dollar return on investment of $15.02.

This would result in a cumulative return of 45.75%. This assumption does not account for the reinvestment of dividends over time. This critical issue is discussed further in the analysis section below.

Pfizer Dividend Payout History - 5 Years

2011

2012

2013

2014

2015

Dividends Per Share

0.80

0.88

0.96

1.04

1.12

Tables 3 Data Source: Pfizer Annual Report

Future Growth Catalysts

The company is in the midst of a new product cycle, with several potential blockbusters (over $1 billion in sales) forthcoming in areas of need like cancer and vaccines. There are now 94 clinical programs in progress, of which eight are on regulatory approval watch. Lyrica is the largest risk element for investors, as it's Pfizer's second-largest drug, bringing in over $4 billion. Lyrica is an anti-epileptic drug that goes off patent in December 2018. Viagra, the fifth largest drug in the company's arsenal, is another drug losing protection, although it will continue to garner royalties from Teva (NASDAQ:TEVA) until April 2020. However, the risks of the patent loss of Lyrica and Viagra can be more than offset by the powerful revenue potential from its vaccine and cancer drugs. The additional key to owning Pfizer is its acquisition potential of new drugs.

Vaccines

Pfizer fortunately maintains a top position in vaccines. Its vaccine division also provides the company some protection against generic competition and provides a very stable revenue stream. Its pneumococcal vaccine, Prevnar 13, is the largest vaccine product for the healthcare giant. The drug has a long patent life ahead and will account for a hefty $6 billion plus in sales for Pfizer for the next twelve months. This revenue line will continue through 2022, with an opportunity for slight improvement as emerging market growth accelerates. Prevnar 13 recently won approval for use in infants in China to prevent pneumococcal disease.

Prevnar 13 is the largest product within vaccines, but Pfizer has several key products in the pipeline, including vaccines for Staphylococcus aureus infections and Clostridium difficile. The two prophylactic vaccines for hospital-acquired infections are in Phase 2 trials. Both vaccines were granted Fast Track status by the U.S. Food and Drug Administration.

Pfizer has vaccines in development that targets the two main disease-causing toxins produced by Clostridium difficile. The firm should get results on phase 2 by year end and assuming a positive outcome, phase 3 trials should begin in the first half of 2017. In 2015, Pfizer announced enrollment of the first patient in a Phase 2b clinical trial known as STRIVE (Staphylococcus aureus Surgical Inpatient Vaccine Efficacy).

The study to find out whether or not the vaccine prevents postoperative Staphylococcus aureus infections in patients undergoing spinal surgery. The Phase 2b study is expected to be completed in early 2017, with final results by year-end 2017. The vaccine should bring in a half billion in sales in five years despite competition from Merck (NYSE:MRK) and Seres Therapeutics (NASDAQ:MCRB). Pfizer also acquired Redvax in 2015 to add a cytomegalovirus (CMV) vaccine candidate.

I expect the company's vaccine product category to generate revenue in excess of $10 billion by 2022.

Cancer

Pfizer's potential is most dependent on Ibrance. It is the primary leader in first-line HR+ (hormone receptor-positive) and HER2- (human epidermal growth factor receptor 2 negative) metastatic breast cancer. The data on the Phase 3 PALOMA-2 study was positive earlier this year. The study represented the third randomized study to demonstrate the benefit of Ibrance when added to hormonal therapy in the management of women with HER2- advanced breast cancer. Expansion of Ibrance to overseas markets will also fuel further growth.

Ibrance was approved in the European Union for treating HR+ and HER2- locally advanced or metastatic breast cancer in November. Label expansion is also a noteworthy potential for Ibrance beyond breast cancer. Pfizer currently has over 60 research programs for Ibrance in multiple cancers. Its multiple studies include PALLAS, PALLET, PENELOPE, and PEARL. The positive results of these studies should further support Ibrance's labels. The drug does have competition on the horizon. But Ibrance is the drug to beat in its class, though Novartis (NYSE:NVS) and Eli Lilly (NYSE:LLY) are both in the race.

Novartis revealed new data on ribociclib. It had very positive results in cutting the risk of disease progression or death by 44%. The company plans to bring it market as quickly as possible to compete with Ibrance. Novartis' product should gain steam in the next several years. Lilly's abemaciclib is further behind Novartis. In August, the drug did meet its goal for efficacy. Lilly was prepared to stop the trial early, but now the abemaciclib combo data will be delayed, and thus, a launch will most likely be postponed to early 2018. That puts abemaciclib far behind Ibrance. On ribociclib, the impact to Ibrance should be limited, as the Phase 3 results for these two products looked very close on an efficacy and on safety. Both Ibrance and ribociclib showed nearly equal progression-free survival rates with a hazard ratio in the mid-50 range.

Given Ibrance's first to market status and multiple ongoing label expansion, it's hard to imagine this key Pfizer drug will not rapidly gain scale over the next five years. Sales of Ibrance have increased by nearly $100 million each quarter since its launch. Ibrance is forecasted to bring in over $5 billion in global sales by 2022, even after ribociclib and abemaciclib hit the market. Some estimates are closer to $8 billion, with add-on viability for Ibrance.

Acquisitions

Future revenue growth was also enhanced with the recent $14 billion purchase of Medivation. Pfizer is counting on Xtandi and talazoparib, which came with the acquisition. Xtandi competes with Johnson & Johnson's (NYSE:JNJ) Zytiga. Pfizer rolled out the first round of new data since it closed on Xtandi maker Medivation in September. Unfortunately, the prostate cancer drug data was not as positive as expected. The 500-patient Plato study was designed to see if Xtandi, when combined with Zytiga, could prove a better alternative. However, the Xtandi/Zytiga combo did not prove efficacy. But Xtandi is already a blockbuster for Pfizer at $1.87 billion in revenue last year. And most analysts peg its revenue, even with the prostate cancer data, at $5 billion by 2021.

Talazoparib is another intriguing acquisition product for Pfizer. It blocks an enzyme that is key to cancer cell development. Talazoparib is a drug that is currently utilized for therapy for breast cancer, but more importantly, can be complementary to Ibrance. It's a PARP inhibitor that could have efficacy for other cancers as well. Other companies, such as AstraZeneca (NYSE:AZN) and AbbVie (NYSE:ABBV), have competing drugs in this category. Another competing firm, Tesaro (NASDAQ:TSRO), released data showing its own PARP inhibitor niraparib significantly improved the outcome of platinum-sensitive recurrent ovarian cancer. That outcome gave additional hope for the category.

Fortunately for Pfizer, there is possibly lots of room for multiple players within PARP inhibitors. Each drug is being tested for unique cancers, making each trial different and picking winners more challenging. Talazoparib EMBRACA Phase 3 trials are scheduled to end during June 2017. Given that Pfizer shelled out $14 billion for the rights to both talazoparib and Xtandi, the firm must believe that both will become very large profit centers for it. Xtandi is already on the way, but the promise of PARP inhibitors is large.

Pfizer also purchased Anacor Pharmaceuticals in June 2016. With the acquisition, the firm gained a new product in crisaborole for dermatitis. The company recently announced that it received FDA approval for crisaborole topical ointment to treat mild-to-moderate eczema in patients two years and older. The ointment will be sold under the brand name Eucrisa. This was a great outcome for Pfizer given its hefty $4.5 billion buyout. The eczema treatment is projected to be a $2 billion blockbuster drug that helps those with scaly and itchy crusted skin. Eucrisa had superior efficacy with clear or near-clear skin after a mere 28 days of treatment. Better yet, it's a first-in-class primary treatment.

Other

My overall thesis on Pfizer's ability to generate growth is primarily based upon three key elements: vaccines, cancer, and future acquisitions.

Outside of these arenas, the company has immunology drug Xeljanz. Analysts have projected that Xeljanz's revenues will rise to $876 million in 2016. The drug has gotten good news in the past twelve months. In March of this year, the European Medicines Agency allowed a review for Xeljanz's application for regulatory approval as a therapy for patients of rheumatoid arthritis who are unable to tolerate methotrexate. Next year, the firm is going to file another application with the FDA to garner approval for ulcerative colitis and psoriatic arthritis.

Biosimilars are a total wild card for Pfizer. They are not considered in my future projections for the company. It was a prime reason for the firm to purchase Hospira. It now maintains control over the products Inflectra and Nivestim. Inflectra has received FDA approval. Pfizer is constructing a manufacturing facility for biosimilar production in China. The biosimilars market could be a huge revenue stream next decade. The company will have potential candidates for several of the most successful bio drugs on the market, including Avastin, Humira, Herceptin, and Remicade. Even if one pays off, it could have a large impact on future share price.

As far as the rest of the pipeline, there are now 94 clinical programs in progress, of which eight are on regulatory approval watch. Although Pfizer did not make many top ten lists for pipeline drugs this year, I feel its potential is very underestimated, especially with the biosimiliars program.

Dividends

Pfizer's dividend was increased by 7% in Q3 2016.The company has maintained a solid three-year growth rate of dividends of 7.7 percent. It currently ranks 4th in yield within the large-cap healthcare, major manufacturer category. The quarterly dividend for the March payment will be $0.32 versus the prior-year rate of $0.30 per share. The dividend will be paid at the new higher rate on March 1, 2017, to shareholders of record at close of business on February 3, 2017. PFE is currently priced at $32.63.

Dividend Projections

In the event that the company's key cancer drugs, vaccines, acquisitions, and pipeline do not produce my expected outcomes, investors in PFE still maintain an advantage due to its high relative dividend yield and growth rate of dividends. I have projected out through 2022 what an investor in Pfizer would earn if there was no price appreciation with an original investment into PFE of $10,000:

Date

Shares Held

Dividend

Price PFE

Payout

Repurchased Shares Next Twelve Months

Cash Remainder

12/19/2016

304

$1.28

$32.83

$389.12

11

$27.99

12/19/2017

315

$1.38

$32.83

$434.70

14

$3.07

12/19/2018

329

$1.49

$32.83

$490.21

15

$0.83

12/19/2019

344

$1.61

$32.83

$553.84

16

$29.39

12/19/2020

360

$1.74

$32.83

$626.40

19

$32.02

12/19/2021

379

$1.88

$32.83

$712.52

22

$22.28

$15.56

A shareholder in Pfizer, assuming a flat stock price, could accumulate 75 additional shares of stock simply based upon dividend collection and repurchase. These figures assume the stock price does not advance over the period, and that the firm continues its 8% annual dividend increases. This is a high safety net for any potential investor in Pfizer and why dividends and the dividend growth rate of any firm are so critical to building wealth.

Overall, Pfizer is one of the least expensive pharma stocks. Priced at $32.62 a share, it trades at a very modest 12.79 forward earnings. The company has key growth drivers in cancer and vaccines, along with a plethora of blockbuster products in development. It has successfully transitioned from its loss of Lipitor into a more diverse company. The firm's large size and broad depth of products makes it less immune to poor trial outcomes in the future. Pfizer has invested heavily in emerging markets and maintains the financial strength to make additional acquisitions. It meets all of my 8 key criteria.

The firm has an outstanding reputation for paying consistently high dividends each year to shareholders and buying back its own stock. Its rate of dividend growth (8%) is also very high considering its size. The yield of nearly 4% is at the high point of its 10-year historical range. The stock maintains a low beta and remains a top candidate for investors looking for exposure to the healthcare sector.

Pfizer is my top healthcare pick for 2017 and ranks #1 on our Top 100 Dividend Stocks list.

Disclosure: I am/we are long PFE, NVS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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