Pfizer Posts Slightly Better-Than-Expected Q2

Pfizer PFE reported second-quarter results slightly ahead of our and consensus expectations, but we don’t expect any significant fair value estimate changes based on the minor outperformance. We continue to view the stock as undervalued, with the market likely underappreciating the firm’s strong immunology pipeline and entrenchment in vaccines. Pfizer’s recent stock appreciation appears partly driven by the firm’s progress with a COVID-19 vaccine along with its partner BioNTech, but we would urge caution in ascribing significant value related to the COVID-19 vaccine; a long duration of COVID-19 vaccine cash flows seems unlikely due to the probable entry of competitive, not-for-profit vaccines and potentially less demand following the pandemic period. Nevertheless, Pfizer’s remarkable ability to potentially bring a vaccine to the market in late 2020 shows the strength of the firm’s ability to develop innovative treatments, a core element supporting its wide moat rating.

In the quarter, total sales fell 3% operationally (excluding corporate restructuring) as headwinds including COVID-19 disruptions (net negative 4% impact) and generic Lyrica competition outweighed gains from oncology drugs, rare-disease drug Vyndaqel, and cardiovascular drug Eliquis. We expect sales growth to accelerate as COVID-19 disruptions ease and the impact from generic Lyrica annualizes. Additionally, the divestment of Upjohn (mature drugs) in the fourth quarter should place the remaining Pfizer business in a strong position for growth beginning in 2021, led by recently launched products and new pipeline drugs. Also, we expect Pfizer’s solid entrenchment in pneumococcal vaccine will strengthen with its next-generation Prevnar 20 vaccine, which has shown favorable data that should defend against an emerging threat from a new Merck vaccine and potentially drive increased pricing power from a franchise representing close to 10% of current sales.

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