By mid-February, I concluded that shares of Pfizer (NYSE:PFE) were moving towards value territory in this premium article, after the company issued a soft 2023 guidance.
This came after the company has seen record results in 2022, yet with the pandemic on its retreat, a repeat of these results was not attainable. This did not come unexpected as valuations were low enough to deliver upside, even if sales and earnings might come under pressure.
A Recap
Pre-pandemic, Pfizer was a $53 billion business in 2019, posting adjusted earnings of $16 billion in the meantime, equal to $2.88 per share. The 5.7 billion shares outstanding valued equity of the company at $228 billion at $40 per share, as this even excluded a $42 billion net debt load, for a $270 billion enterprise valuation.
Pfizer played a big role in creating Covid-19 vaccines, on which it made big bucks, prompting shares to rally to the $60 mark by year-end 2021. Ever since, shares have traded in a $40-$60 range during 2022.
The company actually posted a 2% increase in 2020 sales to $42 billion, although adjusted earnings fell to $2.22 per share, the result of the Upjohn and consumer products divestment, resulting in a reduction in net debt at the same time.
2021 was an outright spectacular year amidst the impact of the vaccine contribution, with sales up 92% to $81 billion as earnings came in at $25 billion, equal to $4.42 per share. The vaccine business grew from $6.6 billion to $42.6 billion, yet organic growth outside vaccines was seen as well. The huge boom in profits meant that net debt came down to the flat line.
The company guided for momentum to continue in 2022, originally seeing revenues for the year around a hundred billion, with further growth again driven by the vaccine business. The company used the cash flow boom to acquire Arena Pharmaceuticals in a $6.7 billion deal in 2021, while announcing a $525 million acquisition of ReViral in 2022. This was followed by an $11.6 billion deal for Biohaven Pharmaceuticals and a $5.4 billion deal for Global Blood Therapeutics.
In January 2023, the company posted 2022 sales at $100.3 billion with adjusted earnings coming in at $6.58 per share. Some $57 billion of this revenue number came from vaccine drugs Paxlovid and Comirnaty. The 2023 guidance felt a bit soft at $67-$71 billion which perhaps is reasonable given the pressure on vaccine revenues, as the $3.25-$3.45 earnings per share guidance looks soft. The $69 billion revenue midpoint is comprised out of an expected $21.5 billion Covid-19 drugs revenue contribution and $47.5 billion operational revenue contribution.
Irony will it that Pfizer has used the pandemic profit boom to pay off quite some debt and to make large inorganic M&A investments into the business, but shares are dead flat at $40 again, marking no share price growth over the past three years.
It is noteworthy that earnings growth has lagged profit growth, as the guidance is a bit underwhelming, but the pipeline of the business has arguably made a huge advancement following the dealmaking spree, with many deals only having closed recently. At just 13 times forward earnings (which are down a lot), including a modest vaccine contribution, and debt being down a lot, appeal was seen in my book at the shares at $43 by mid-February.
A Big Deal
Just a week after I voiced an upbeat tone by mid-February, Pfizer announced a huge $43 billion deal to acquire Seagen, looking to buy the company at $229 per share. The deal was a massive bet on Seagen’s antibody-drug conjugate technology as the company is only set to add $2.2 billion in revenues in 2023, from its product line of four medicines, royalty and collaboration revenues as well as license agreements.
That is just part of the promise, as Pfizer believes that Seagen could contribute some $10 billion in sales by 2030, making this really a long term growth profile and play. With a current 20 times multiple being paid, the deal will hurt near term earnings; in fact, a neutral impact to adjusted earnings per share is only seen three or four years post closing, and that is after the anticipation of a billion in costs synergies at such a point in time!
With 5.7 billion shares representing just a $234 billion equity valuation at $41 per share, and the company operating with a flattish net cash position by year end 2022, it is clear that Seagen is a substantial deal. After all, the $43 billion valuation is equal to about 18% of the valuation of Pfizer, pushing up the enterprise valuation to $277 billion. That 18% number is high as the deal is set to add just 2% to pro forma sales, while being a meaningful detractor to earnings per share here.
Pro forma net debt of around $43 billion is substantial in dollar terms but, manageable, as the goal for Pfizer is really to deliver on growth, by integrating a flurry of deals in recent times. These many multi-billion deals and the timing of the Seagen deal is a bit surprising and perhaps aggressive.
And Now?
Since urging an upbeat tone at $43 in mid-February, shares have fallen about $1-2, shedding nearly $10 billion in value, in part in response to the Seagen deal, although the market at large has seen a solid recovery following the banking turmoil which rocked the market in March.
While the increase in net debt and pressure on near term earnings is a bit underwhelming, the overall expectations are non-demanding, as there could be upside to the 2023 guidance, if you ask me. While I am not too pleased with the Seagen deal, I am sticking to an upbeat tone here.
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