Pfizer Steady, Shares Look Undervalued

Pfizer PFE reported steady first-quarter results slightly ahead of our and S&P CapIQ consensus expectations, but we don’t expect any major changes to our fair value estimate based on the minor outperformance. We continue to view the stock as undervalued with the market not likely fully appreciating the firm’s entrenched portfolio and growing pipeline, which also supports its wide moat.

In the quarter, total sales fell 1% operationally (excluding the consumer joint venture) due to Chinese pricing pressures and generic competition to neuroscience drug Lyrica, but we expect growth will accelerate going into 2021 as these issues annualize. Also, several entrenched drugs should continue to post gains, including cancer drug Ibrance (up 11%) as new indications in earlier lines of therapy are likely following data expected by year-end. Cardiovascular drug Eliquis (up 29% aided by some stocking) should take more share from warfarin, which needs more intensive doctor monitoring. Also, Pfizer’s pneumococcal vaccine Prevnar 13 (down 1% partly due to lumpy government purchases) is holding up well despite coronavirus concerns potentially keeping patients out of doctors’ offices. While we expect some slowing with new drugs Xtandi (cancer), Vyndamax (cardiology), and Braftovi/Mektovi (cancer) as sales teams and doctors are disrupted by the coronavirus, we still expect gains due to the severity of the underlying diseases. We remain bullish on Pfizer’s immunology pipeline, led by abrocitinib, which recently showed superior data versus competing atopic dermatitis leader Dupixent.

On the restructuring side, Pfizer is making progress to sell its generic drug group Upjohn to Mylan in the second half of 2020 (delayed from mid-2020 due to coronavirus disruptions). We expect the transaction will largely create net neutral synergies but should not cause valuation destruction, which was implied by the market reaction to the initial news of this transaction in late July 2019.

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