Investors threw piles of money at up-and-coming biotechs last year, and that was before the coronavirus pandemic accelerated the trend even further. This capital isn't taking any direct routes to big pharmaceutical companies, but it's going to reverberate along Pfizer's (PFE 0.23%) bottom line eventually.
Over the next five years, investors can expect a lot more new drug approvals to emerge from Pfizer's pipeline than they're used to. Here why a recent frenzy for biotech start-ups makes Pfizer a good stock to buy now and hold for the long run.
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Capital inflows
New biotech companies have gone public at a rate of about one per week for the last few years and many are thriving. The number of publicly traded biotechs with market caps above $200 million more than doubled over the past five years to reach 727 at the end of 2020.
The coronavirus pandemic accelerated the flow of capital to early-stage biotech companies in 2020. That means there are heaps more lucrative co-development deals waiting to happen than anyone imagined possible just 12 months ago.
During a recent conference, Pfizer's CEO Albert Bourla told investors the company would focus on first-in-class candidates that have already passed human proof-of-concept studies. Each step along the drug development pathway is exponentially more expensive than the one before it and finding a partner like Pfizer to help with the heavy lifting is almost always the best option.
Why choose Pfizer?
Clinical-stage biotech companies with compelling human proof-of-concept data have lots of potential dance partners to choose from. And Pfizer's recent successes put it in an awfully strong negotiating position.
At the beginning of 2020, BioNTech (BNTX 0.55%) had never run a big phase 3 trial, submitted a new drug application, or manufactured anything at scale. Last March, BioNTech signed a deal with Pfizer to co-develop a successful COVID-19 vaccine that's already expected to generate around $14 billion in sales for the partners this year.
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It already looks like Pfizer's achievement with BioNTech is improving Pfizer's ability to attract lucrative deals. In December, Myovant Sciences (MYOV) chose Pfizer to jointly develop and commercialize relugolix, a first-in-class drug the FDA recently approved to treat patients with advanced-stage prostate cancer. Relugolix is also under review at the FDA as a potential new treatment for uterine fibroids.
In addition to recent success with BioNTech, Pfizer also successfully markets a tablet for prostate cancer called Xtandi in partnership with Astellas. With this in mind, Myovant Sciences accepted an upfront payment of just $650 million, with an additional $3.6 billion in milestone payments that won't trigger unless Pfizer can help relugolix succeed much further than it already has.
In the numbers
Before accounting for contributions from coronavirus vaccine sales, Pfizer expects top-line revenue to grow by at least 6% annually between now and 2026. The company expects an even better performance along the bottom line with earnings that could rise by a double-digit percentage.
Earlier this year, Pfizer spun off its portfolio of older, post-market exclusivity products and merged it with Mylan to form Viatris (VTRS 0.98%). Pfizer will receive about $12 billion from Viatris this year in addition to operating cash flow that reached between $10 and $11 billion last year. That gives Pfizer plenty of cash to fuel a torrent of co-development deals over the next few years while increasing its dividend payout at the same time.
Pfizer will probably make good on its double-digit bottom-line growth estimate, but the stock price has been a bit depressed because investors are worried that incoming patent expirations for today's blockbuster drugs will prevent Pfizer from growing at more than a snail's pace after 2026. Mountains of financial resources and skilled teams of professionals to attract an unprecedented number of new partnerships, though, suggest this stock can outperform over the long run.
