Financial Pros Top 5 Pharma Stocks

Covid is dead. Weight loss is in.

Eli Lilly’s (LLY) stock has been on a tear, while Pfizer’s (PFE) sits at multi-year lows.

However, a recent announcement from Pfizer’s CEO let the world know the company was currently developing its own weight loss drugs with and without the same technology as the popular Ozeimpic.

That got financial pros buzzing about the stock, with search volume jumping in the last week.

Even though it will be years before any potential Pfizer drugs hit the market, there’s reason to believe the stock has a lot more value than most investors realize.

Pfizer’s Business

Pfizer Inc., a name synonymous with pharmaceutical innovation, stands at the forefront of healthcare. 

With a legacy spanning over 170 years, Pfizer’s unique blend of scientific rigor and global outreach has cemented its position as a leader in the quest to improve human health.

The company’s operations extend beyond the mere development of medicines and vaccines; Pfizer is dedicated to advancing wellness, prevention, treatments, and cures that challenge the most feared diseases of our time, serving over 200 countries.

Pfizer’s sales are broken down by care area as show below.

Source: Pfizer Q1, 2024 Press Release

Covid sales helped Pfizer rake in profits for a year or two.

Since then, sales have plunged as fewer folks get the vaccine.

That’s sent sales of products like Paxlovid and Comirnaty down 50% and 88% YoY for Q1, respectively.

Yet, it’s seeing robust sales for products like Eliquis for blood clots and Vyndaqel for cardiomyopathy.

Source: Pfizer Q1, 2024 Investor Presentation

In late 2023, Pfizer purchased Seagen for $43 billion, which was known for its cancer drugs and treatments.

Financials

Source: Stock Analysis

In fact, if you exclude Covid products, total sales increase by 10% YoY for the first quarter.

Annualize those numbers, and sales are about 20% higher than in 2018 and 2019. Yet, the stock trades below its previous levels.

Margins have slipped as Pfizer ramps up production of new drugs while losing sales on its Covid products.

However, the company generates over $8 billion in cash from operations and $5 billion in free cash flow.

Currently, that doesn’t cover the $9 billion it pays in dividends. And it holds $58 billion in net debt.

Yet, it’s coming off two years of $33 billion and $29 billion in cash from operations. Plus, margins should improve as new drug production ramps up while others wind down.

Valuation

Source: Seeking Alpha

Investors are pricing Pfizer quite fairly. It trades at 18.7x cash and 21.6x forward earnings. 

The price-to-cash ratio is certainly higher than its peers. But as we mentioned, the cash flow should improve in the coming quarters.

On other measures, such as price-to-sales, Pfizer is rather cheap, with only Bristol Myers Squibb (BMY) coming in lower.

Growth

Source: Seeking Alpha

Other than Eli Lilly, the overall industry is struggling to find growth.

Every competitor except Lilly expects negative EBITDA and EPS growth next year.

It’s not surprising to see many of them try and scoop up other companies as a means to buy growth.

Profitability

Source: Seeking Alpha

Pfizer’s gross margins are quite low, even with the portfolio rebalancing it’s undertaking.

That hit its margins all the way down the line, resulting in the lowest returns on equity, assets, and total capital of the group.

Our Opinion 7/10

We aren’t concerned about Pfizer’s future. It’s just a matter of when things will happen.

Waning sales of Covid products are already priced into the stock.

What we need is guidance on the margins and cash flow.

Dividends aren’t in danger of being cut. However, don’t expect anything beyond modest hikes in the next year.