While Pfizer (NYSE: PFE) was the first coronavirus vaccine developer to have its product approved by regulators, its stock fell 3.5% compared to last year. This is far below the S&P 500gain of 15% in the same period. Many investors are rightly asking: what gives?
It turns out that the culprit is not the coronavirus vaccine, but the company’s main business. If you had invested $ 5,000 in Pfizer a year ago, you would have lost about $ 175 of your money. Fortunately, the company has just the catalyst it needs this year to rekindle its momentum and turn investors’ losses into gains.
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What went wrong?
The United States Food and Drug Administration (FDA) is currently approving a record number of generic drugs to reduce drug prices. The initiative provides much-needed relief for patients and insurers, but it has been nothing short of a nightmare for generic drug makers, like former Pfizer subsidiary Upjohn.
More competing products reduce profit margins and growth potential for everyone. Upjohn’s revenue fell almost 20% year over year in the third quarter of 2020. Things got so bad that Pfizer decided to break up the business, which means losses of about $ 8.5 billion, or about 14 , 5%, in annual revenue.
Can the coronavirus vaccine save Pfizer?
Without the rewards of the coronavirus vaccine, management estimates that Pfizer would make $ 40.8 billion to $ 42.4 billion in sales in 2020 and increase that metric by 6% per year until 2025. After counting its vaccine (Comirnaty), however, everything changes.
During clinical tests, Comirnaty showed 95% effectiveness against COVID-19. Only mild to moderate side effects were reported after vaccination. This type of risk-reward balance is exceptionally favorable. So far, regulatory agencies in more than 45 countries have released the vaccine for use.
Pfizer, together with its partner BioNTech (NASDAQ: BNTX), has received orders for more than 1 billion doses of its vaccine. Priced at $ 14.70 to $ 19.50 per dose, this would bring Pfizer a potential of $ 7.5 billion to $ 10 billion in future revenue (after adjusting for a gross profit split of 50/50 with BioNTech). It is safe to say that Pfizer should be able to replace all lost sales from the Upjohn spin-off, and more.
In addition, the company has six factories worldwide to produce Comirnaty. This includes the installation of BioNTech in Marburg, Germany, which can potentially produce more than 750 million doses of the coronavirus vaccine each year. Production there will begin in February.
Management has also raised its production expectations, estimating that Pfizer will be able to manufacture 2 billion doses of its coronavirus vaccine this year, compared to an earlier estimate of 1.3 billion. As icing on the cake, Comirnaty has also shown that it is effective against circulating mutant strains of SARS-CoV-2.
What is the verdict?
This year, Pfizer expects to generate up to $ 3.10 in earnings per share thanks to its new coronavirus vaccine. This represents an impressive 30% increase from the upper limit of his $ 2.38 earnings estimate for 2020.
Given its growth trajectory, Pfizer is an incredible business, trading at 4.3 times sales and 20 times free cash flow. The company is also leveraged conservatively, with a debt ratio of just 0.3. (When this multiple is greater than 1, it means that a company may have problems meeting its loan obligations. This is not the case with Pfizer.)
For these reasons, I recommend that those who bought at Pfizer continue to hold the shares. If you haven’t already bought the stock, now is a decent time to make a move. At the moment, there is a shortage of vaccines against coronavirus worldwide. Pfizer would also exceed prescription expectations if vaccinated patients needed booster shots as immunity declined over time. There is one last bonus: biotechnology also boasts an impressive annual dividend yield of 4%.