Pharma giant Pfizer (PFE 1.00%) has grabbed plenty of headlines in the past couple of years thanks to its coronavirus-related work. The company has also been one of the better-performing drugmakers over this period.
Although Pfizer is firing on all cylinders right now, there are plenty of reasons to be even more optimistic about the healthcare giant's future. In fact, let's look at 31 billion reasons investors should strongly consider purchasing shares of this top pharma stock.
Cash is king
Pfizer's revenue and earnings have soared in the past year and a half thanks to Comirnaty, its COVID-19 vaccine, and Paxlovid, its COVID-19 treatment. Naturally, the drugmaker's pile of cash has gotten a lot bigger too. Pfizer ended the first quarter with $31.78 billion in free cash flow. Not only does that represent a 50.36% year-over-year increase, Pfizer now boasts a higher free cash flow figure than most of its similarly sized peers in the pharmaceuticals industry.
PFE Free Cash Flow data by YCharts.
There are plenty of reasons why it's crucial for any business to generate healthy levels of cash, one of which is that companies need to take care of their expenses and their financial obligations. It's also important for businesses to invest in themselves -- for instance, by pouring funds into research and development -- to remain relevant in any competitive industry. Further, many corporations resort to dividend increases or stock buybacks to reward shareholders, and these initiatives take cash.
What does this mean for Pfizer's future?
Pfizer wasn't exactly strapped for cash before its recent massive success in the coronavirus vaccine and medicine market. But the company won't complain about its cash balance rising substantially over the past couple of years as it grants it even more freedom when it comes to planning for the future, particularly in the mergers and acquisitions (M&A) domain.
In an investor conference call on Dec. 13, 2021, the company's chief business innovation officer, Aamir Malik, said the following in response to an analyst question regarding the company's capital allocation plans:
We plan to be very active in deal-making, and we certainly have the ability to do that. We have significant firepower that we expect both through our ongoing operating cash flows, our current cash holdings and investments, and, if warranted, the ability to raise substantial amounts through debt financing .... We see an exciting set of opportunities to deploy that capital both in our internal pipeline but also externally on compelling science that is either later stage or medical breakthroughs that are earlier stage.
Pfizer held this investor conference call after announcing its intention to acquire Arena Pharmaceuticals for $6.7 billion in cash. The transaction closed in March. Arena Pharmaceuticals brings with it several pipeline candidates that primarily target immuno-inflammatory diseases.
Earlier this month, Pfizer completed yet another acquisition. This time the deal involved a privately held clinical-stage biopharmaceutical company called ReViral. The transaction will cost a total of $525 million, including an upfront payment and future milestone payments.
ReViral boasts several therapies that target the respiratory syncytial virus. Pfizer will likely deploy its pile of cash to make more moves in M&A within the next couple of years. Why is that important? Pharmaceutical giants routinely face patent cliffs. And while Pfizer already has a solid pipeline of its own -- including 90 ongoing clinical trials -- acquiring promising candidates from other companies will help bolster its lineup.
Thankfully, funding won't be a problem. Pfizer also expects to continue rewarding shareholders by way of dividend increases, and of course, it will continue pushing its current programs forward.
A solid stock to buy
Pfizer's non-coronavirus lineup isn't doing very well. In the first quarter, the company's sales excluding Comirnaty and Paxlovid increased by only 2%. While the drugmaker is relying on its COVID-19 portfolio to grow its top and bottom lines right now, if it continues to be active in M&A, that will pay rich dividends down the road, literally and figuratively.
Despite Pfizer's excellent prospects, it remains fairly undervalued. The company's shares are trading for just seven times forward earnings compared to a forward price-to-earnings ratio of 13.4 for the pharmaceutical industry. Pfizer looks like a steal at current levels.
