When it comes to your hard-earned money, you have a lot of choices about where to spend it. If your physician prescribes a new branded drug, though, you and your insurance company have few options.
Patent-protected exclusivity is the reason pharmaceutical stocks are known for delivering reliably growing dividend payments. Unfortunately, some of Pfizer's (PFE 0.30%) most important patents are expiring soon.
Shares of Pfizer have been beaten down about 60% from their previous peak in 2021. The price is way down, but the company has raised its dividend payout every year since 2009. At its beaten-down price, the stock offers an enormous 7.1% yield.
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At recent prices, the yield you receive from Pfizer is more than four times the amount you'd receive from the average dividend payer in the S&P 500. If it can't maintain its payout-raising streak, though, it won't help you retire any faster than buying a simple index fund that tracks the benchmark index.
Pfizer's built from many pieces that are moving in opposite directions. To make sure this stock isn't a yield trap destined to slash its dividend payout in the near term, let's weigh the good news against the bad.
Why Pfizer stock is way down
Patent-protected market exclusivity is a lot shorter for drugs than for most other forms of intellectual property. Typically, generic competition begins hammering sales of branded drugs a little over a decade after they earn their first marketing approvals from the Food and Drug Administration (FDA).
This January, Pfizer's CEO, Albert Bourla, warned investors that a loss of exclusivity (LOE) wave will reduce annual revenue by $17 billion to $18 billion over the next several years. The losses are expected to mostly begin in 2026 and end in 2028.
The biggest LOE to hit Pfizer will be Eliquis, an oral blood thinner that it markets in partnership with Bristol Myers Squibb. Eliquis sales fell slightly in the first quarter, but it's still responsible for 14% of Pfizer's total revenue. Generic competition is expected to begin next year in the EU, and in 2028 for the U.S. market.
Sales of some of the products expected to lose ground to generics over the next few years are already getting hammered by similar drugs from competitors. For example, first-quarter sales of Ibrance, a breast cancer treatment, fell by 7% year over year. Kisqali, a similar drug from Novartis recently approved to treat early stage breast cancer patients, grew sales by 52% over the same period.
Pfizer's biggest growth driver at the moment, Vyndaqel, is approved to treat a relatively rare heart condition caused by unraveling transthyretin (TTR) protein fragments. Unfortunately for Pfizer, it's no longer the only TTR stabilizer available. Attruby from BridgeBio Pharma became the second approved treatment that stabilizes TTR last November, and is expected to pressure Vyndaqel sales.
How Pfizer could overcome upcoming patent cliffs
With total revenue that reached $62.5 billion over the trailing 12 months, filling in a hole that could grow to $18 billion wide won't be easy. Fortunately, this isn't Pfizer's first patent cliff. In 2009, one drug, Lipitor, was responsible for 23% of Pfizer's total revenue. Lipitor sales crumbled when it lost exclusivity in 2011, but that didn't stop Pfizer from continuing an annual dividend payout raising streak that was just a couple of years old at the time.
During the COVID-19 pandemic, Pfizer raked in a larger profit than any pharmaceutical company in history. It reinvested much of that windfall into new products. By 2030, management expects those products to deliver a combined $20 billion in annual revenue..
Pfizer's expectations are ambitious, but its pipeline has been extremely productive. In 2023, the FDA approved nine new drugs from Pfizer. Last year, the agency granted more than a dozen approvals to new and already marketed treatments.
In 2023, Pfizer spent around $43 billion on Seagen, a cancer drug specialist that used to outsource the manufacturing of its products. Manufacturing Seagen's products directly gives Pfizer an opportunity for margin expansion.
PFE Gross Profit Margin data by YCharts
If gross margins that contracted in recent years expand back above 80%, and new product launches achieve $20 billion in annual sales, Pfizer will have no trouble meeting and raising its dividend commitment in the decade ahead.
Not a yield trap
Continued payout raises at a modest pace are a long way from guaranteed. That said, Pfizer's enormous pipeline of upcoming and recently launched treatments is well equipped to overcome upcoming patent cliffs and maintain its dividend-raising streak.
Before you fill your portfolio with Pfizer stock, it's important to remember that drug launches are highly unpredictable. If the company can't hit its targets, a dividend reduction that lowers your yield on cost down to 3% or 4% is also a possibility. Odds of continued payout bumps seem stronger. Either way, folks who buy now have a great chance to come out ahead if they hold the stock a decade or longer.
