On July 18, Pfizer (PFE 1.10%) announced that it is forging a strategic alliance with Flagship Pioneering, a venture capital (VC) firm, in which the pair would invest $50 million each into 10 different programs in development by a subset of Flagship's portfolio of biotech companies.
The move comes during a period in which the pharma giant has been busy planting many different seeds for growth down the line, as shown by its recent plans to acquire Seagen for $43 billion as well as its $25 million equity investment in Caribou Biosciences.
So will teaming up with Flagship's biotechs lead Pfizer to growth through the rest of the decade and beyond, and should you buy it? Let's take a peek at what the pair actually agreed to, and figure it out.
NYSE: PFE
Key Data Points
This is a major investment
Per the terms of the deal, Pfizer now has the right to acquire whichever of the 10 programs it pleases. Flagship's companies will gain the right to $700 million in milestone payments and royalties if their assets are actually commercialized, which means there's a total of up to $7 billion in play. The pair will work together to pick which programs to invest in, with the goal being to focus on early-stage assets that have large addressable patient populations.
But Flagship isn't just any VC firm -- it's a pillar of the biotech funding scene, and its portfolio includes some of the most successful biotechs in the world, like Moderna. That doesn't necessarily mean that the programs in development by its companies of interest are guaranteed to succeed, or even that they're significantly more likely to succeed than non-Flagship ones.
Nonetheless, it means that Flagship companies' research and development (R&D) efforts enjoy privileged access to a large network of resources; these include some of the best scientific talent available and good relationships with researchers at top universities, not to mention plenty of cash. Therefore it's probable that the programs Flagship oversees have a small edge.
Given that Pfizer is aiming to add $25 billion in annual revenue by 2030 via business development deals like acquisitions, teaming up with Flagship is another step toward accomplishing its goal. It's also working on adding another $20 billion in yearly sales before the same deadline by commercializing projects which are currently in its pipeline. But there's a major wrinkle that could make the near term a bit bumpy.
The move could take a long time to pay off
In 2022, Pfizer brought in just over $100 billion thanks to white-hot sales of its coronavirus vaccine Comirnaty, as well as its antiviral pill Paxlovid for treating coronavirus cases. But Wall Street analysts see it bringing in only around $67 billion in revenue for this year, and $68 billion in 2024.
And for 2023, management isn't disagreeing with their estimate. In other words, a big decline in revenue is already happening, and it's the sharp drop in demand for coronavirus medicines that's to blame. The chances are negligible for the decline to suddenly reverse due to renewed interest in those products.
This means that the stock is a riskier investment than usual as there's a risk that its transition to new revenue sources will falter or take longer than expected. Furthermore, the agreement with Flagship will almost certainly take a few years before it starts to pay off, assuming it does. And the returns for shareholders after that point are more likely to be incremental than transformational. This suggests that you probably shouldn't buy Pfizer stock for the first time just because of the new alliance with Flagship, though it is a positive factor.
However, if you're looking for an excuse to buy more shares because you're already bullish, this is it. The market can't price in the upside associated with the commercialization of any of the therapy programs in question, because they haven't been picked yet, and they might not get commercialized at all. So if you hold onto your shares and add to them over at least the next few years, there's a good chance you'll profit -- and Pfizer probably isn't done teeing up more opportunities to make money by 2030, either.
