While Pfizer (PFE 0.52%) was the first coronavirus vaccine developer to have its product approved by regulators, its stock is down 3.5% over the past year. That is far below the S&P 500's 15% gain over the same period. Many investors are rightfully asking: What gives?
As it turns out, the culprit is not the coronavirus vaccine but the company's core business. If you had invested $5,000 in Pfizer a year ago, you would have lost about $175 of your money. Luckily, the company has just the catalyst it needs this year to reignite its momentum and turn investor losses into gains.
What went wrong?
Right now, the U.S. Food and Drug Administration (FDA) is approving a record number of generic medications in order to drive down drug prices. The initiative provides much-needed relief for patients and insurers alike, but has been nothing short of nightmarish for generic drug manufacturers, such as Pfizer's former subsidiary, Upjohn.
A larger number of competing products squeezes profit margins and growth potential for all. Upjohn's revenue fell by nearly 20%, year over year, in the third quarter of 2020. Things got so bad that Pfizer decided to spin off the business, which means losses of about $8.5 billion, or roughly 14.5%, in annual revenue.
Can the coronavirus vaccine save Pfizer?
Without the rewards of the coronavirus vaccine, management estimates that Pfizer would realize $40.8 billion to $42.4 billion in sales for 2020 and grow that metric by 6% per year until 2025. After accounting for its vaccine (Comirnaty), however, everything changes.
During clinical testing, Comirnaty showed 95% efficacy against COVID-19. Only mild to moderate side effects were reported after vaccination. That kind of risk-reward balance is exceptionally favorable. So far, regulatory agencies in over 45 countries have cleared the vaccine for use.
Pfizer, along with its partner BioNTech (BNTX 2.25%), has received orders for over 1 billion doses of its vaccine. With a price tag of $14.70 to $19.50 per dose, this would bring Pfizer a potential $7.5 billion to $10 billion in upcoming revenue (after adjusting for a 50/50 gross profit split with BioNTech). It's safe to say that Pfizer should be able to replace all of its lost sales from the Upjohn spin-off, and then some.
Moreover, the company has six manufacturing facilities across the world to produce Comirnaty. This includes BioNTech's Marburg facility in Germany, which could potentially produce over 750 million doses of the coronavirus vaccine each year. Production there will commence in February.
Management has also upped their expectations for production, estimating that Pfizer will be able to manufacture 2 billion doses of its coronavirus vaccine this year, up from a previous estimate of 1.3 billion. As icing on the cake, Comirnaty also demonstrated that it is effective against the currently circulating mutated strains of SARS-CoV-2.
What's the verdict?
This year, Pfizer expects to generate up to $3.10 in earnings per share thanks to its novel coronavirus vaccine. That's an impressive 30% increase from the upper end of its earnings estimate of $2.38 for 2020.
Given its growth trajectory, Pfizer is an amazing deal trading at 4.3 times sales and 20 times free cash flow. The company is also conservatively leveraged with a debt-to-equity ratio of just 0.3. (When that multiple is higher than 1, it means a company may have problems fulfilling its loan obligations. That's not the case for Pfizer.)
For these reasons, I recommend that those who bought into Pfizer continue holding onto the stock. If you haven't bought into the stock yet, now is a decent time to make a move. Right now, there is a shortage of coronavirus vaccines worldwide. Pfizer would also stand to blow past revenue expectations should vaccinated patients require booster shots as immunity subsides over time. There is one last bonus: The biotech also boasts an impressive 4% annual dividend yield.