The last five or six years have been a roller-coaster ride for Pfizer (PFE +0.30%) and its shareholders. It was a fun ride on the way up, but after peaking in late 2021, the pharmaceutical giant's stock price has plunged. It is now down more than 55% from its 2021 high-water mark. This could be a buying opportunity for some long-term investors, but there's a caveat here that might dissuade one particular type of investor from jumping on board.
Pfizer is a drug industry survivor
There are numerous small pharmaceutical companies worldwide. There is only a handful of large ones. It is fairly common for small pharma companies with promising drug pipelines to be acquired by the industry's giants. Pfizer is one of the giants, boasting a $145 billion market cap despite the stock having lost more than half its value. Pfizer knows how to survive.
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What's notable is that the pharmaceutical industry is a highly competitive one that faces stringent regulations and requires substantial capital investment, as well as high research and development costs. Finding new drug candidates, proving their efficacy, getting them cleared for human use, and then selling them are much bigger tasks than they might sound. This is why companies that bring out new drugs are given a period of time in which they are the exclusive seller of those drugs.
There's one small problem: When a new drug's patent period ends, the revenue it generates tends to fall materially. That's what's known as a patent cliff. Patent cliffs are a common occurrence in the drug industry, and Pfizer is approaching one in 2027 and 2028 when the patents on Ibrance, Eliquis, and Vyndaqel are set to expire. The good news is that Pfizer's history suggests it will find a way to survive and thrive in the long term.
Why the dramatic ups and downs?
Part of the reason why Pfizer's price has been so volatile since 2020 is related to investor emotions. During the pandemic period, Wall Street was overly enamored of any drug company that had a COVID-19 vaccine to offer. So Pfizer, one of the vaccine makers, saw its stock rocket higher. Investors started to move away from the stock when the world learned to live with COVID-19. And then the realities of the upcoming patent cliff become even more prominent. The stock is currently trading below its level at the start of 2020.
That's not necessarily an unrealistic price, but the stock's price-to-sales, price-to-cash flow, and price-to-book value are all below their five-year averages. The only traditional valuation metric above the five-year average is price-to-earnings. If you think in decades and prefer value-oriented stocks, Pfizer could be a solid selection for your portfolio.
NYSE: PFE
Key Data Points
That's highlighted by the company's aggressive pursuit of Metsera (MTSR +0.00%). After agreeing to a deal, Metsera came up with another bidder, forcing Pfizer to up its offer. The fact that Pfizer can compete effectively to make acquisitions like this clearly shows that it will do what's necessary to survive.
The problem with Pfizer
If you are looking at Pfizer as a drug stock that is out of favor but likely to overcome its drug cliff issues, you might want to consider buying it. However, the current 100% dividend payout ratio suggests that dividend investors should be cautious. When the company acquired Wyeth in 2009, the board of directors cut the dividend.
Wyeth was a bigger deal, but with Pfizer's payout ratio so high, there isn't much wiggle room for the dividend. In other words, despite the attractive 6.6% yield, it is probably better to view Pfizer as a turnaround stock than a dividend stock. If the dividend survives, it will be icing on the cake.
