Pfizer Inc (PFE) Com Stk USD0.05 (CDI)

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Pfizer’s second quarter revenue increased by 3% to $13.3bn, despite the $1.3bn decline (87%) in sales of its COVID-19 vaccine. A key growth driver was the Vyndaqel family of anti-inflamatory medicines which are approved for the treatment of a group of rare diseases. Sales of cancer treatments were also up strongly.

Operating losses were $0.1bn compared to a profit of $2.3bn reported a year previously. This reflected an increase in restructuring charges and one-off costs for the manufacturing optimisation program.

Pfizer raised full-year 2024 revenue guidance by $1bn at the midpoint to a range of $59.5-62.5bn. That’s growth of 9-11% if you exclude sales from COVID-19 medicines and the Seagen acquisition. Guidance for underlying earnings per share has been raised by 13% at the midpoint to $2.45-2.65.

The shares were up 1.8% in pre-market trading.

Our view

Pfizer’s second-quarter earnings showed that it’s started to turn the corner as the effect of sharply falling COVID-related sales diminishes. There’s been some impressive growth across the portfolio but also some disappointments.

Growth should pick up across the rest of the year and a succesful quarter of Research & Development delivery paints an improving picture for product launches. But there remains significant execution risk to overcome before a turnround can be declared. Further wins in the clinic will also be needed to mitigate the so-called patent cliff. Between 2025 and 2030, the company is facing the loss of exclusivity over several key products which account for around $17bn of revenue.

Pfizer's banking on its ambitious research program to make a big impact on revenue by the end of the decade. However, we caution that there remain significant hurdles to success, including take up by patients and regulatory approvals. Pfizer's R&D hit rate is higher than most. Still, only about 1 in 5 make it from pre-clinical research all the way through to regulatory approval.

Another risk is legislative action on drug pricing, which remains firmly under the microscope of US politicians. In particular, Pfizer's biggest revenue generator, the blood thinner Eliquis, is one of the first drugs to be subject to price negotiations with the US Department of Health following new legislation.

The acquisition of Seagen saw net debt skyrocket to around $59bn last year. At about 3x forecasted underlying cash profit, it’s not too terrifying, but if there are any negative earnings surprises, the 5.6% prospective dividend yield could come under pressure. Of course, no payouts are assured.

In the short term, the deal won't be earnings enhancing. But it doubles the size of the development pipeline in cancer, with the focus shifting to novel medicines with the potential to replace chemotherapy in some tumour types. Pfizer thinks it can more than quadruple Seagen’s revenues to over $10bn by 2030, but that's not without the usual risks of drug development. It will be a while yet before we find out if the hefty premium paid has been worth it.

Pfizer's got a strong record of commercialising blockbuster therapies. And at 11.8 times forward earnings, it's trading at the lower end of its peer group. But there's a sizeable chunk of revenue that needs to be filled as COVID-related sales dwindle and exclusivity on certain products disappears. There’s some solid progress being made but investor sentiment is likely to remain sensitive to hiccups along the way.

Environmental, social and governance (ESG) risk

The pharmaceuticals sector is relatively high-risk in terms of ESG. Product governance, particularly with safety and marketing, and affordable access to treatment are the key risk drivers. Labour relations, business ethics and bribery and corruption are also contributors to ESG risk.

According to Sustainalytics Pfizer's overall management of material ESG issues is strong. Board-level oversight is in place and there are adequate policies and programmes on bribery, corruption and whistleblowing. Implementation could be an issue, though, given it's being investigated by the SEC and Department of Justice regarding bribery allegations. Pfizer was recognised by the Access to Medicine Index for its value-based healthcare initiatives, but disclosure of list and net price changes in the US has deteriorated over the past few years. The group's transparent with its trial data, but falls short of best practice in other areas of product governance.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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