Pfizer Getting Closer to Humira Biosimilar
Pfizer (NYSE:PFE) recently revealed that its biosimilar to AbbVie's (NYSE:ABBV) Humira treatment, PF-06410293, achieved positive top-line results. Humira, a treatment for rheumatoid arthritis, also happens to be the world's best-selling drug, with $14 billion in annual sales, so Pfizer's investors have reason to be excited.
For one thing, Pfizer is making a significant bet on biosimilars, which it anticipates to grow into a $20 billion market by 2020. Including PF-06410293, Pfizer has announced positive top-line results for three of its biosimilars in the last four months. That includes biosimilars to Genentech's Herceptin and Johnson & Johnson (NYSE:JNJ) and Merck's (NYSE:MRK) Remicade.
Investors looking to build a solid base for their portfolios can look with confidence at Pfizer. At 3.82%, its current dividend yield outperforms the average yields of both the Dow Jones Industrial Average and the S&P 500 (both of which count Pfizer among its components) by at least 100 basis points. At the same time, its yield is much higher than its peer groups', which is just north of 2%.
To put this into perspective: In 2016, Pfizer's stock was up by 2.23%, while its dividend yield was 3.72% - that's total return of nearly 6%. Now, to be sure, this was short of the return of both the Dow (14.1%) and S&P 500 (10.5%). That being said, Pfizer's performance was far superior to the return of its sector. To wit, the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) fell by 21.6% in 2016.
Biosimilars and Beyond
Biosimilars is currently just a $330 million business for Pfizer (annualized from its segment Q3 results). However, with the potential to become a $20 billion industry in three short years, it's easy to see why Pfizer is eager to get into biosimilars in a big way.
The attraction is obvious: these blockbusters are a proven path to profits. Moreover, Pfizer doesn't need to educate the market in the same manner that Johnson & Johnson, Merck and AbbVie did for their own blockbusters - they effectively did the heavy lifting for competitors like Pfizer, which is why it's unsurprising that Johnson & Johnson filed a suit (and lost) to block Pfizer's biosimilar to Remicade.
Even if Pfizer manages to grow its annual biosimilars revenue to only $3 billion - a middling 15% of the potential market - that represents around 10x growth from its current levels. Pfizer's current net margin is 10.12%, so each $1 billion of new revenues contributes around $0.02 per share of profits. In short, biosimilars alone could boost Pfizer's income by $0.06 by 2020 - assuming it's successful in bringing its biosimilar treatments to market.
The Trump Effect
In just over a week, the Trump administration will transition into the White House, and one of the biggest changes is likely to be in tax policy. For a company like Pfizer, Trump impacts it in two ways: through its one-time tax discount of 10% on profits held overseas and through a reduction in the corporate tax rate from 35% to 15%.
Depending on the estimate, Pfizer could have between $80 billion and $146 billion in profits parked overseas, which is why its effective tax rate was under 18% in the third quarter - operating in lower tax jurisdictions and keeping the minimum required for its U.S. operations gives it an attractive arbitrage. Pfizer has been notorious for maximizing its tax savings, which is why it entertained a merger with Allergan (NYSE:AGN) before the Obama administration closed tax loopholes that made the merger palatable.
Trump's tax plan, should it pass Congress, could give shareholders a boost in two ways.
First, assuming the lower amount of $80 billion that Pfizer disclosed in its annual reports does not understate its overseas profits, investors could be looking at a sizable one-time dividend. After a 10% deduction, Pfizer would have $72 billion in overseas profits that it could potentially return to shareholders - either as a cash dividend or through share buybacks. Assuming that Pfizer elects to keep most (say 90%) of the after-tax cash, or $64.8 billion, as operating funds, it could choose to pay out the balance of 10% - roughly $7.2 billion - as a one-time dividend of roughly $1.18% per share.
Second, while its effective tax rate of 17.7% is much lower than the current corporate tax rate of 32% to 35%, it is still 270 basis points higher than the 15% tax rate proposed by President-elect Trump. This 270 basis point difference would have worked out to additional earnings of $43.4 million in the third quarter - or approximately $0.01 of earnings per share.
Pfizer is currently trading at a very reasonable 12.7 times its forward earnings estimate of $2.63 per share - but this information considers a slightly higher tax rate. If we apply the tax savings from going from a nearly 18% effective tax rate to a 15% flat tax rate, Pfizer should be looking at earnings of $2.67 per share by the end of 2017, implying a lower multiple of 12.5-times earnings. That would put it at a significant discount to the 25-times multiple of the S&P 500.
We like Pfizer at something approaching 15-times earnings, giving us a price target of $40 per share (or 19.7% above the current market price), considering its relatively strong prospects from biosimilars and the potential for investors to pile into the stock, given its high dividend and the potential for a one-time special dividend from Trump's plan.
Investors should note that our target is only modestly higher than the consensus, which is at $38 per share, and gives investors the potential for a 23.5% total return on the stock for 2017. Considering Pfizer's financial strength and strong brand, that's as strong a portfolio base as an investor could wish for.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PFE over the next 72 hours.
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.
Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.