Lacuna HC Observer #42: Pfizer’s Shopping Spree

?"The individual investor should act consistently as an investor and not as a speculator."?— Ben Graham

Introduction

Pfizer (NYSE: PFE) is one of the large biopharmaceutical names based out of the US, which became more famous over the last year due to its Covid-19 vaccine. The company focuses on developing and manufacturing vaccines and prescription drugs across therapeutic areas such as Oncology, cardiovascular, immunotherapies, and rare diseases.

In 2021, the biopharmaceutical giant clocked USD 81,2bn in sales, out of which over 45% of the total sales were contributed by Cominarty, the vaccine used to treat covid-19.

Continuing the momentum, Pfizer delivered another robust set of results in Q2FY22, where it generated USD 27,7bn out of which USD 16,9bn was generated from its Covid franchise (Cominarty and Paxlovid). The ongoing strong set of results has helped the company to generate more than double the average free cash flow (FCF) it had been generating in the past. In 2021, the company generated FCF of almost USD 30bn which is 2,5x of the FCF generated in 2020.

This has not only helped the company to de-lever its balance sheet but also helped the management to start building a stronger product portfolio.

So what lies ahead?

While the company is reporting excellent numbers due to its Covid franchise, investors fear that these numbers would not keep growing. Eventually, the number will come down. Along with that 7 of its drugs across different therapeutic areas are going to lose its patent protection by 2027. In 2021, these drugs contributed ~USD 24bn in the total revenue (54% of the total revenue excluding covid franchise).

In short, Pfizer is facing a huge patent cliff and needs to fill the vacuum which will be created on account of patent expiration.

While Pfizer has its own in-house pipeline with over 80 products across different clinical stages, the management has been actively looking for inorganic opportunities to maintain its topline. As mentioned above, excess cash flow has further strengthened the inorganic growth way.

In the last few months, Pfizer has completed the below-mentioned acquisitions.

Lacuna’s view

We see Pfizer approaching a huge patent cliff for which the management along with the in-house pipeline is looking for inorganic opportunities. The nature of these acquisitions appears to be expensive, and we are cautious of the future capital allocation decisions in the light of the company generating anomalous cash flows and would like to refrain from speculating. But you never know, the market can surprise us in ways we don’t expect to!