Pfizer

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Pfizer Inc. is a global biopharmaceutical company, engaged in the discovery, development, manufacture, marketing, sales, and distribution of medicines, vaccines, and other pharmaceutical products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Pfizer’s moat is moderately wide. It has strong economic moats in several of its key products, notably through its research and development capabilities and its regulatory know-how. While the company’s brand is strong, the intense competition in the pharmaceutical industry and the increasing prevalence of generics and biosimilars means that it is not a very wide moat. Based on the company’s high levels of patents (as a source of intangible advantage), which it has continually worked to replenish its product pipeline via R&D expenditures over time and the presence of economies of scale through its immense distribution capabilities (especially for blockbuster medicines), a 3/5 rating is reasonable.

  • Key Moat Drivers:
    • Patents: Pfizer relies heavily on patents to protect its revenue streams for a given period, especially for new and innovative drugs. This protection is not infinite, because the patents expire and can be challenged by competitors but it provides significant pricing and economic power for a limited time, allowing the company to generate large profits.
    • Regulatory expertise: The pharmaceutical industry is heavily regulated. In this type of setting, a company requires certain regulatory licenses, approvals or certifications in order to manufacture and sell their products. Given the sheer scale of Pfizer, it has developed a lot of expertise in the area of obtaining these approvals, hence creating an economic moat that has few competitors in their ability to produce new drugs and get them approved in the market.
    • Economies of Scale: The scale advantages are both in terms of production capabilities and established distribution networks. The cost of production and distribution is significantly lower for firms with larger sales volume or market reach, allowing large incumbents like Pfizer to lower costs in an efficient manner and maintain their profit margins even with price pressures.
    • Brand: Although Pfizer’s brand is strong and well recognized across the globe, unlike companies such as Coke and McDonald’s, which are able to create a very large pull through their brand, a pharmaceuticals brand is less important for sales volume or maintaining margins.
  • Legitimate Moat Risk Factors:
    • Patent Expirations: Pfizer’s economic moat is vulnerable to the expiration of key patents. When patents expire, competitors can produce generic or biosimilar versions of Pfizer’s drugs at lower costs, thereby eroding Pfizer’s revenues and profits. Pfizer’s continued investments in R&D is its counterstrategy here.
    • Regulatory Challenges: Stricter regulatory requirements can delay product launches or even prevent a drug from entering the market. Also, adverse changes in the regulatory environment can affect Pfizer’s profitability and pricing power of the drugs in the market.
    • Generic and Biosimilar Competition: Generic versions of drugs are readily available at much lower prices after the expiration of the original patents. Biosimilars (biological versions of already approved branded drugs) is also a fast-growing space. The ease of launching those products at a much lower price poses a significant risk to Pfizer’s market share and pricing power.
    • Pipeline Risks In a business whose profitability is very contingent on drug approval and patent exclusivity, having few or underperforming pipeline products puts the company at higher risk from an economic point of view, with the potential to significantly hinder revenue growth.
    • Dependence on a few Key Products: The company’s revenue is at times dependent on a few blockbuster drugs which have generated massive revenue for it, when those patents expire the company’s revenue and profitability could be seriously hurt.
    • Litigation: Pharmaceutical companies face constant litigation, either from competitors for patent infringements or consumers for side effects from drugs. This could be very financially damaging, which is why it can cause a significant risk to a company with an existing product.
  • Business Resilience: Despite the numerous potential risks, Pfizer is quite resilient because of the large diversified business, its immense size and distribution capabilities and a history of R&D and product innovation. Its large profits and the ability to reinvest those for continuous innovation, while diversifying the product offerings and improving global market penetration enables Pfizer to be resilient.

Recent Issues: As we can tell from the latest earnings call, the company is facing some headwinds. One major issue is the decline in sales for their COVID related products, especially Paxlovid and Comirnaty. Because of this, they will be cutting costs by about $3.5 billion by the end of 2024 and more in the upcoming years. They are also facing some patent expiration risks for some of their blockbuster drugs, which may start affecting revenues in the next 5-10 years. However, the company’s strong growth in other newer drugs has proven itself as a source of long-term revenues. Their main emphasis in the next few years would be on growing the non-COVID products, where the company can gain a significant share of sales and revenue. The company is continuing to focus on R&D and increasing the number of clinical trials, as well as M&A opportunities. However, if you put all of these aspects together, the company might still see a reduction in its margins and returns on capital in the near term. * One of the ongoing concerns is around their M&A activity, specifically with their recent acquisition of Seagen. Given this is a massive undertaking from Pfizer and with Seagen being a company with limited profitability, investors are a bit cautious on the effects of this acquisition.

  • Revenues Distribution: As the world’s largest pharmaceutical company, Pfizer’s revenues are derived from a global customer base. Their sales come from two main categories: Biopharma and Global Established Pharmaceutical (GEP). Biopharma sales accounts for a vast majority of total sales, while GEP sales accounts for a smaller percentage. The biopharma segment focuses on highly patented newer drugs and medicines, while the GEP segment focuses on generic medicines and off patent drugs that the company has been selling for years. There is a significant geographical revenue distribution, with the United States accounting for almost half of their revenues and rest being from Europe, Asia and other international markets.
  • Industry Trends: The pharmaceutical industry is marked by intense competition among firms, the rapid pace of technological change (drug discovery), the growing prevalence of generic and biosimilar products, and increasing regulatory complexities. Furthermore, the drug prices are under constant pressure as the governments and the public at large are seeking ways to reduce costs. This creates a challenging operating environment for pharmaceutical companies. The industry also faces high R&D costs and frequent failures with new drugs that do not meet requirements. There is also a growing trend to use more efficient methods to research and distribute drugs such as through Artificial Intelligence, mRNA, etc.
  • Margins: Pfizer has consistently generated high operating margins (north of 20%). They are able to generate these margins because of strong brand recognition for their products, and patented drugs that allow them to gain a significant level of pricing power.
  • Competitive Landscape: Pfizer faces competition from multiple sources, including other large pharmaceutical giants, generic drug manufacturers, biotechnology firms, etc. The company also has to compete for R&D investments, as companies are competing for scientific talent. Furthermore, the company also has to remain on the top of its game with patent lawsuits and regulatory approvals.
  • What Makes Pfizer Different: Pfizer’s wide breadth and scale enable it to compete effectively in the various markets across the globe. Through its size and scale, the company has developed very strong capabilities in clinical research, regulatory filings and approvals, manufacturing and distribution, giving it a competitive advantage over smaller firms. Also, the company has immense R&D capabilities and has been actively involved in creating novel products, which sets it apart from other drug manufacturers.

Pfizer’s Understandability Rating of 3/5. A pharmaceutical business is complex and hard to understand. Most of their future revenue is contingent on new product discovery and regulatory approvals, making it difficult to analyse. The nature of pharmaceutical products are not as easily understandable when compared to commodity businesses. They are also very dependent on regulatory policies and can be severely affected by changes in those policies. The competition among players is also complex to assess, and new entrants and technologies can disrupt the whole business model in a quick time.

  • Balance Sheet Health: Pfizer has a robust balance sheet and has been showing a consistent free cash flow. Over the last 5 years, the company has produced more than $10 billion in annual cash flows. Their liquid assets are much more than its debt. It’s worth mentioning here that the large debt level (over $30 billion) means that if the debt rating worsens, then the cost of debt financing will increase and may affect profitability.

Pfizer has a large amount of intangibles and goodwill from previous acquisitions on their balance sheet, which may have a small impact in the long-term performance of the company, but given they are a large pharmaceutical giant, those assets can be viewed as a good investment that will increase the value of the underlying business.

  • With a current ratio of around 1.4x and a debt to equity ratio less than 1.5x, Pfizer is in a very good place financially.