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Investor Does Fundamental Analysis on Pfizer (PFE) - Stock Analysis For Beginners

06 Aug 2021

Transcript

00:00 About Pfizer

Millions of people have this company’s medical product in their bloodstream. Me and many of you included! And during their recent earnings report, this company also updated that they might have a game-changing product - pills to treat COVID-19!

Hey guys, I’m Alex. Welcome to Behind The Stock where I dissect company information and annual report to discover and identify investment opportunities for you. We upload new episodes every Friday! Make sure to subscribe and turn on the notification bell!

Today’s episode is about one of the largest pharmaceutical company, Pfizer! Some of you might be familiar with Pfizer only because of their Covid-19 vaccine but they actually manufacture many of the world’s well-known medications.

Founded in 1849 by Charles Pfizer and Charles F. Erhart, Pfizer has been around for over 170 years! The company has been through all sorts of historical events like the Civil War, The Great Depression, World War I and World War II.

During World War II, penicillin was used to combat infections in soldiers. It was used to treat blood poisoning. So naturally, the drug was in shortage, and they couldn’t produce large enough quantities fast enough. However, Pfizer managed to find a way to mass-produce penicillin, saving many wounded soldiers.

And of course, recently on 11 December 2020, the US FDA issued the first Emergency Use Authorization for a vaccine. This allowed the Pfizer-BioNTech COVID-19 Vaccine to be distributed in the U.S. And now, Pfizer’s vaccine is being administered in 111 countries.

In Pfizer’s recent earnings report, the company announced an update on a potentially game-changing product. Their investigational pill to TREAT COVID-19. It could also be used as prevention for close contacts of COVID-19 cases.

Pfizer is studying an antiviral protease inhibitor in clinical trials. This type of drug stops viral replication, which then reduces viral load. Lower viral load equals fewer symptoms.

A phase 1 study showed positive safety results and drug tolerability. Phase 2 out of 3 of the trial has just started. And if all goes well, Pfizer will file for Emergency Use Authorization in Q4 for these pills. With the vaccine for the prevention of Covid-19 and the pills to treat, this could be very good for the company.

Of course, Pfizer isn’t new to being pioneers. Something commonly found and used today is citric acid. Traditionally the way to make it is using unripe citrus fruit. But a food chemist hired by Pfizer pioneered the mass production of citric acid without using citrus but instead used sugar. Citric acid today is now commonly found in many food products. It's also used to stabilize or preserve medicines and as a disinfectant against viruses and bacteria.

Since that success Pfizer began applying fermentation to other products and experimented with innovative technologies to increase their output.

Now Pfizer has wide range of medical products. You might recognize these famous brands by Pfizer like Advil, Celebrex, Diflucan, Viagra, and more. Now, there’s an interesting story behind Viagra aka the little blue pill.

Viagra was created to treat high blood pressure and angina. In 1991, it was patented in the UK as a heart medication BUT early trials for the medication showed that it didn't work for the treatment of heart disease. However, the volunteers in the clinical trials saw some OTHER side effects. I’m sure some of you men know what this drug does. If you don’t know then Google. So yes, that’s how Viagra was discovered.

Pfizer has definitely play major roles in many historical events and these are just a few examples. They have also achieved many discoveries including many of the medications we take today.

04:39 Pfizer Business Overview

Now let’s move on to Pfizer’s business overview. Pfizer generates revenue globally through the development, manufacture, and sale of a wide range of biopharmaceutical products. They work across developed and emerging markets.

If we look at the revenues by market, about half comes from the US. 6% each for China and Japan. The other markets represent less than 40%. Pfizer also collaborates with other companies to develop therapies and medicines. For example, Pfizer recently developed an mRNA-based vaccine for COVID-19 in collaboration with BioNTech SE, a German-based biotechnology company. Due to the nature of the pharmaceutical industry, the companies require significant spending on R&D.

In Q2 of 2021, Pfizer’s R&D expenses increased 22% compared to previous year. That’s because the company is spending more for the development of the vaccine and therapeutics to help treat COVID-19, amongst other things.

05:40 Pfizer Growth

Now let’s see what some growth drivers for Pfizer are. There are 3 major trends that could creating long-term growth opportunities for Pfizer.

First, an aging global population. Aging population equals higher demand for innovative medicines and vaccines. Second, advances in biological science and digital technology. This allows them to have more breakthroughs in new medicines and vaccines. Third, increasingly significant role of hospitals in healthcare systems, which Pfizer works closely with.

Besides that, the other growth opportunities that I also see for Pfizer is Price Increases.

Pfizer’s current deal with the U.S. government is for 200 million doses of the COVID-19 vaccine, which is enough to vaccinate 100 million people at no cost to them. Combined with other vaccines available, everyone in the U.S. should be able to receive the vaccine for free.

Pfizer has announced that there is a significant opportunity to increases the prices of the vaccine. That’s something the company is considering once the pandemic shifts into an endemic state, which is when most places are vaccinated.

Some experts estimates that the vaccine profits this year will be between $15 billion to $19 billion, to be shared with BioNTech.

Another growth prospect is the Strategic Acquisitions & Collaborations.

The notable one is of course, their collaboration with BioNTech to develop the Covid-19 vaccine. More recently in July 2021, Pfizer and Arvinas announced a global collaboration to develop and commercialize a type of drug. Still in clinical trial, this drug targets a certain estrogen receptor that is a well-known disease driver in most breast cancers.

Other than that, Pfizer has made many significant acquisitions to grow the company and reached unprecedented levels of success. In 2019, they acquired Array Biopharma and Therachon. In 2016, they acquired AstraZeneca's small-molecule antibiotics business. And the list goes on.

For Alex Meter, I rate Pfizer’s growth as good.

07:33 Pfizer Moat

Now, moving on to the competitive advantage of Pfizer. I would say it’s intangible asset.

Pfizer has a wide portfolio of patent-protected drugs. This then gives Pfizer pricing power. For pharmaceutical patent, there's typically protection on that patent for 20 years. In certain cases, it may be extended for more than 20 years.

During the 20-year life of the patent, other drug manufacturers cannot sell generic alternatives of the product. Otherwise, they would risk lawsuits and penalties. Since they have market exclusivity, they can price it however they see fit, hence the pricing power.

Pfizer is then able to generate strong cash flow from their products. With the financial resources, they were able to grow bigger and develop even more new drugs. Pfizer is now launching several potential life-changing drugs for cancer, heart disease, and immunology.

For Alex Meter, I rate Pfizer’s competitive advantage as strong.

08:26 Pfizer Risks

Next, let’s look at Pfizer’s risks. As with many pharmaceutical companies, the concern is regulatory risks.

There are many health and safety guidelines that they would have to adhere. And when manufacturing drugs, a huge part of it is running clinical trials. These are extremely expensive and can be a lengthy process. Also, as you would expect, Pfizer has been the subject to many lawsuits over the decades. It’s been said that Pfizer has paid billions in settlements.

Other regulatory risks also include price regulation in certain markets like UK, China, Japan, Canada and South Korea. Meanwhile, in the US, many are calling for reforms in pharmaceutical product pricing. Pfizer products could be subjected to increasing pricing pressures as a result.

Another risk that Pfizer faces is competition. Their main competitors include Merck & Co, Novartis, Johnson & Johnson, and more.

Pfizer faces competition from manufacturers of generic drugs. Once drug patents are expired, they become generic drugs. So, Pfizer loses market exclusivity for their previously patented drugs. When competitors’ branded products.

One of the most popular drugs that Pfizer is known for, Viagra, just had its patent expire in April 2020. In China, Pfizer expect to continue to face intense competition by certain generic manufacturers, which may result in price cuts and volume loss of some products.

For Alex Meter, I rate Pfizer’s risks as mid to high risk.

09:54 Pfizer Financial

Next on, let's look at the financial of the company. In terms of revenue and net income, they are pretty consistent. For past few years their profits are slightly impacted because some of their drug patents have expired. Margin wise, if you look at the gross profit margin, it is considered more than 75%. Net profit margin is above 15% on average and return of equity above 10% on average. Debt is slightly high at 0.58x. They are also able to generate strong operating and free cashflow

For Alex Meter, I rate Pfizer’s financial as decent.

10:27 Likes & Dislikes about Pfizer

Here’s what I like and dislike about Pfizer.

What I like is that Pfizer has a strong pipeline of drugs. This means they are not reliant on only one or a few specific drugs to generate revenue.

Also, once they have developed the drugs successfully, they have patents to protect them for many years so that they can sell it exclusively.

And here’s what I dislike. Because of the industry they’re in, they’re very highly regulated. Before the drugs are introduced into the market, they need to go through stages of clinical trial. It’s good for the consumer because you want the drugs to be safe. However, for the business, clinical trials require A LOT of resources in time and money. And even after it’s launched, they still face regulatory scrutiny. If the drugs are found to have certain side effects, the authority can force them to recall back the drugs.

Another thing I dislike is that there is price control on drugs. This is to make sure that they’re not too expensive for patients.

So, after watching my analysis, would you add Pfizer into your watchlist?

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Till then, I’m Alex and goodbye!