Pfizer (PFE 0.47%) is a fairly well-known drugmaker, with a name that even non-healthcare-oriented types would likely know. That's a testament to the company's longevity and its success as a business. But the stock has fallen roughly 60% from its 2022 peak. Could stepping in to buy the downtrodden shares of Pfizer help turn you into a millionaire?
What does Pfizer do?
Pfizer is a drug company. That's a very complex line of work, with the company searching for and developing new drugs. It then has to test the drugs and get them approved by regulators. There are huge costs along the way, which is why drugmakers like Pfizer are allowed to have a time-limited right to be the exclusive producer of the new drugs they develop. The patents that protect the new drug, however, eventually run out.
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When a patent runs out, other companies can make generic versions of the drug. This usually leads to a massive drop in revenue from the impacted drug because customers shift to the lower-priced generic offering. And this creates a patent cliff for drug developers. This means that companies like Pfizer are always spending heavily on research and development to find new drugs to offset the hit from older drugs that have lost, or are soon to lose, patent protections.
Pfizer has a long history of managing this typical business cycle fairly well. And, if you think in decades and not days, it is probably a fairly decent healthcare stock to consider adding to your portfolio. Now, in fact, could be a very interesting time to buy it.
What went wrong in 2022?
If you look at the chart above, you'll notice that Pfizer's stock price peaked in 2022 and then crumbled. It is now down nearly 60% from the 2022 high-water mark. That, however, has more to do with investor emotion than with the company's core business model.
When the coronavirus pandemic hit, drugmakers like Pfizer rushed out vaccines. Wall Street extrapolated the COVID-19 vaccine story way too far into the future, pricing unrealistic expectations into Pfizer's stock price. To put a number on that, between 2020 and 2022, the stock's price-to-sales ratio went from a low of around 3 to a peak of 5.5 before crumbling all the way back down to just below 3 again.
Revenue did rise, but the boost was temporary because it was driven by what was really a one-time event -- the pandemic. The revenue line of Pfizer's income statement has come back down to Earth, and, at the same time, it is facing patent cliffs on some key drugs. After being overly enthusiastic, investors are extra downbeat on the stock today.
But Pfizer is really just working through a typical business cycle with its core business, noting that it is, indeed, working on its drug pipeline to ensure it has new drugs to sell. If history is any guide, Pfizer will find new drugs or, given its large size (it has a market cap of $140 billion), it can simply buy a smaller drug maker.
NYSE: PFE
Key Data Points
In other words, there's no reason to believe that Pfizer's business is broken. And that could make it a valuable addition for investors looking to create long-term wealth. Alone, it probably won't make you a millionaire, but mixed in with a more diversified list of stocks, it could easily help you get to a seven-figure net worth over the long term.
A caveat for income investors
Pfizer has increased its dividend for 15 consecutive years. It currently offers a huge 6.8% dividend yield. That makes Pfizer look like an attractive dividend stock. But the string of dividend increases started following a dividend cut made at roughly the same time Pfizer undertook a major acquisition. This is not to suggest that Pfizer's dividend is at risk right now, only that the board of directors is willing to cut the dividend if there is a strategic reason to do so.
In other words, investors who want reliable dividends may want to look at other high-yield pharma stocks with better dividend track records. There are several, including Merck and Bristol Myers Squibb. But that doesn't mean Pfizer isn't a solid option for those who are really looking for a stock with turnaround appeal. And the currently lofty yield might be a worthwhile risk to take on as long as you don't need the income you generate to pay your living expenses.
