Skip to Content
Stock Strategist

Pfizer's Pipeline Productivity Is Improving

The pharma giant is mitigating its patent losses, and we think it's undervalued.

Mentioned: , , , , ,

We are holding firm to our $38 fair value estimate following  Pfizer's (PFE) steady fourth-quarter results, which largely matched both our and consensus expectations. We believe the investment community underappreciates the company's long-term earnings growth potential of 9% annually over the next five years, driven by the Allergan (AGN) merger and share repurchases. While we believe the investment community remains skeptical that the merger will occur, we don't see the U.S. Treasury Department stopping the deal, nor do we expect the U.S. Congress to block it. As a result, we expect Pfizer to gain a more rapidly growing portfolio of drugs, a lower tax rate, and a stronger economic moat with more diversified patent-protected drugs. Further, Allergan offers fast-growing branded drugs as well as a robust group of older established drugs that should fuel both parts of Pfizer's innovative and established groups, creating a stronger platform to potentially announce a company breakup in 2018. At the current stock price, Pfizer looks undervalued to us.

In the quarter, growth from vaccine Prevnar 13 and recently launched drugs helped offset generic competition, leading to 5% year-over-year operational growth (excluding the Hospira acquisition). While the organic growth rate is likely to slow in 2016 as Prevnar sales annualize the U.S. bolus of adult patients recently approved for treatment, several other recently launched drugs are poised for rapid growth. In particular, breast cancer drug Ibrance is well positioned to generate peak annual sales of more than $6 billion, and while competition is emerging from Eli Lilly (LLY) and Novartis (NVS) in this drug class, we believe Pfizer's first-mover advantage and lack of differentiation in the class will lead Ibrance to the majority of market share. Several other key pipeline assets are also poised for growth, including diabetes drug ertugliflozin, which should launch next year in a one-tablet fixed combination with Merck's Januvia.

Damien Conover does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.