Pfizer (NYSE:PFE) is America's largest pharmaceutical company, but it's about to become a lot smaller. A narrow focus could lead to explosive growth, but it won't make cash flows any more predictable.
Will Pfizer give investors the earnings growth they desire, or should they prepare for trouble ahead? Here's what you need to know about the factors that will determine the pharma giant's direction over the next five years.
Wider profit margins ahead
In August, Pfizer shifted its over-the-counter brands to a new company it owns 32% of called GSK Healthcare. GlaxoSmithKline (NYSE:GSK) owns the rest of the combined business, and this isn't the only big deal on Pfizer's agenda.
Pfizer's relationship with its Upjohn subsidiary hasn't gone sour, but they won't be living under the same roof much longer. Pfizer and generic-drug-making giant Mylan (NASDAQ:MYL) will be forming a new company that sells Pfizer's Lipitor, Viagra, and other brands that have lost market exclusivity.
Pfizer shareholders will own 57% of the combined company, and around a year after it's finally been given a name, it could begin paying a significant quarterly dividend. Next year, the combined entity is expected to generate more than $4 billion in free cash flow from top-line sales of between $19 billion and $20 billion.
Once the transaction's completed, the combined company will spend about a year using all its available profit to lower debt related to the transaction. Once debt reaches an easily sustainable level, though, the company will begin distributing 25% of free cash flow as a quarterly dividend.
On the way down
Domestic sales of Pfizer's Lyrica are quickly losing ground to generic versions of the blockbuster nerve pain reliever that reached pharmacy shelves in July. Lyrica delivered $5.0 billion to Pfizer's top line in 2018, and $2.4 billion in the first half of 2019.
Wholesalers already began de-stocking branded Lyrica in favor of generics months ago, so we can expect a dramatic drop in the second half of 2019. Lyrica sales make up around 9% of Pfizer's total revenue, so this isn't as severe as previous patent cliffs.
Lyrica's loss will make a dent, but it should be the last major dent until 2023 at the earliest. Pfizer's best-selling drug at the moment, Ibrance, could lose market exclusivity in the U.S. in 2023, followed by the rheumatoid arthritis treatment Xeljanz in 2025. These expirations could sting because Xeljanz and Ibrance were responsible for around 13% of Pfizer's total revenue during the first half of 2019.
While expiration dates on the main patents that protect Xeljanz and Ibrance are approaching fast, Pfizer will most likely find ways to extend market exclusivity for at least a few more years.
Xeljanz and Ibrance aren't the only blockbuster drugs in Pfizer's product lineup that are climbing fast. Second-quarter sales of Eliquis, a blood thinner that Pfizer markets in partnership with Bristol-Myers Squibb, rose 26% year over year to an annualized $4.3 billion.
Sales of Pfizer's nearly forgotten cancer drug Inlyta will probably jump from an annualized $416 million in the second quarter to more than $2 billion annually in 2024. Sales of Inlyta have been disappointing since it earned approval to treat relapsed kidney cancer patients in 2012, but the FDA recently approved a combination of Inlyta plus Keytruda from Merck & Co. to treat newly diagnosed kidney cancer patients. Clinical trial results showed the combination therapy reduced the risk of death by 47% compared to standard care.
Transthyretin amyloid cardiomyopathy is a rare disease that affects around 100,000 people in the U.S., although only a sliver of the population has been properly diagnosed. Vyndamax is a once-daily capsule that holds transthyretin together, and sales of the drug could rise from just a trickle at the moment to more than $1 billion in 2024.
Earlier this year, Pfizer acquired Array Biopharma, a biotech that successfully discovered several highly targeted cancer drugs. Array's combination of Braftovi and Mektovi hasn't been successful as a treatment for the small population of melanoma patients with tumors harboring BRAF mutations, but that's about to change.
In May, Array presented trial results that show Braftovi plus Mektovi reduced the risk of death by 48% for people with advanced colon cancer. A likely approval to treat the larger population of colon cancer patients with BRAF mutations could drive annual Inlyta sales way past $1 billion by 2024.
No big deals
Pfizer spent $11.4 billion on Array Biopharma, and that's the largest acquisition you'll probably see from the company between now and 2024. Pfizer has learned from previous patent cliffs that depending on a megamerger to produce growth doesn't always work out.
Instead, Pfizer will stick to acquiring experimental new drugs that show promise in early clinical-stage testing. Despite the loss of Upjohn, Pfizer will have plenty of firepower to assemble a much larger pipeline. Following the formation of a new company with Mylan, the Pfizer that remains will still produce operating cash flow between $11 billion and $12 billion in its first year.
By the time 2024 rolls around, today's highly active mid-to-late-stage development plans should begin producing enough new blockbusters to overcome Pfizer's next round of patent expirations. That makes it one of the best big pharma stocks that you can buy right now.