Pfizer (PFE 0.73%) shareholders have plenty of reasons to be optimistic. Shares of the big drugmaker are up 15% over the last 12 months, well above the return of the S&P 500 index. Pfizer's dividend yield of nearly 3.4% looks also should bring smiles to investors' faces. And the company arguably has its strongest pipeline in years.
But the future won't necessarily be a cakewalk for Pfizer. There are several potential obstacles that could cause the big pharma company to stumble. Here are the three greatest risks that Pfizer faces.
1. Major healthcare system changes
Perhaps the most significant of all the risks for Pfizer is the possibility of major upheaval in the U.S. healthcare system. Politicians in both parties have made drugmakers the targets of their wrath. Lawmakers are especially focusing on drug price increases they consider to be unwarranted.
It's not surprising then that Pfizer attracted criticism when it announced price increases for 41 of its drugs effective Jan. 15. Investment firm Leerink conducted a study that found Pfizer was one of the major pharmaceutical companies most dependent on drug price increases to spur revenue growth. That could be problematic if big changes are made that hamper Pfizer's ability to boost prices for its drugs.
Then there's the potential for single-payer healthcare in the United States. The Medicare-for-All proposal by Sen. Bernie Sanders would radically change the dynamics for many companies in the healthcare sector. Drugmakers would negotiate only with the federal government on drug prices. That would almost certainly mean Pfizer wouldn't be able to charge as much for its drugs.
2. Slowing sales for top drugs
Sales for Pfizer's top drugs could slip even if there aren't huge changes in the U.S. healthcare system. Actually, you can bet that sales for several of the company's blockbuster drugs will fall. Lyrica, which made $4.6 billion in 2018, loses patent exclusivity this year. Enbrel already faces competition from biosimilars in Europes.
Competition could present problems for other Pfizer drugs as well. The company is counting on breast cancer drug Ibrance to be a growth driver for years to come. But Ibrance faces a big challenger with Eli Lilly's Verzenio. Several drugmakers also have promising drugs that could be on the market within the next few years.
Pfizer's biggest-selling product right now is pneumococcal vaccine Prevnar 13. But Merck aims to take Prevnar 13 head-on with its V114 that's currently in late-stage clinical studies and could potentially win FDA approval next year.
3. Significant pipeline setbacks
Every biopharmaceutical company faces the risks of pipeline failures. Pfizer is no exception.
If you look at Pfizer's pipeline, you'll find that six of its late-stage programs are evaluating Bavencio in treating various types of cancer. But Pfizer and its partner, Merck KGaA, which is based in Germany and is a different company from the U.S.-based Merck, already announced one late-stage failure for the immunotherapy in treating lung cancer. That doesn't mean other phase 3 studies will flop, but it underscores the risk Pfizer faces.
Pipeline setbacks can also come in the form of an FDA decision against approval for a drug. Pfizer had such an experience a year ago, when the FDA rejected approval of the company's biosimilar to Herceptin. While the company subsequently obtained approval for the biosimilar last month, the year-long delay hurt.
Putting the risks in perspective
Investors shouldn't ignore the risks Pfizer faces. They're real, and they could potentially cause the big pharma stock to underperform over the next few years. At the same time, though, these risks should also be put in perspective.
Pfizer has successfully navigated major changes to the U.S. healthcare system before. Even though the company raised prices on 41 of its drugs this year, Pfizer has adjusted to the new political dynamics and expects the net impact on revenue to be minimal. Also, the implementation of a single-payer healthcare system in the U.S. faces an uphill battle.
And while Pfizer could be hurt by competition for its top drugs or pipeline setbacks for key candidates, the company's product lineup and pipeline are well diversified. No product currently generates more than 11% of total revenue. Pfizer's pipeline includes around 100 programs, 26 of which are in late-stage development.
Investing always comes with risks. But there's no reason for Pfizer's risks to diminish investors' optimism about the company's long-term prospects.