Pfizer (PFE 0.48%) is in the Wall Street doghouse. It is currently viewed as an also-ran in the drug sector, lagging far behind peers like Eli Lilly (LLY +1.26%) in various categories, including the hot GLP-1 weight-loss drug space. With Pfizer's shares trading down 55% from their coronavirus pandemic highs, some investors would rightly wonder if it is a stock to avoid. But given Pfizer's history of growth, others are likely asking if it is a contrarian investment opportunity worth jumping on.
What does Pfizer do?
Pfizer is one of the world's largest pharmaceutical companies. Even after losing more than half of its value, it still has a $145 billion market cap. While that doesn't give it enough heft to break into the world's top 10 healthcare stocks, it isn't far behind Intuitive Surgical (No. 10 on the list), which has a market cap of around $190 billion.
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The drug sector is highly competitive. It is also highly regulated and highly technical. Finding, developing, producing, and distributing drugs is a very difficult and expensive process. This is why drug companies are granted a limited period of exclusivity when they develop a new drug. That's both good and bad.
While patent protections are in place, companies like Pfizer can make huge profits from blockbuster drugs. However, when patent protections end, generic versions of drugs come into the market. That generally leads to the name-brand drug losing market share and material declines in sales. This is known as a patent cliff.
Drugmakers are always on the lookout for new drugs because they know that they will eventually face patent cliffs. The development of new drugs doesn't always align with patent expirations. This is one of the big problems for Pfizer right now: It faces patent expirations in the next couple of years but has a less-than-exciting pipeline of new drugs.
Don't count Pfizer out
The interesting thing here is that there's nothing particularly unusual about Pfizer's business right now. The events happening today are normal for a drug company. The big problem is that Pfizer has fallen behind peers like Eli Lilly in developing new, headline-grabbing drugs. The big category right now is GLP-1 weight loss drugs, and Pfizer's internally developed drug flamed out.
However, during the coronavirus pandemic, Pfizer was one of the early providers of a COVID-19 vaccine. At that time, investors were rushing into the stock like lemmings, pushing the price to all-time highs. The current low point is down from that pandemic-era high. Add in the company's lack of a GLP-1 drug, and you can see why mercurial investors are avoiding Pfizer's stock.
NYSE: PFE
Key Data Points
If you are a contrarian, however, you should probably be thinking about the long-term opportunity rather than the short-term gyrations that are normal for a drugmaker. Pfizer has proven it can develop blockbuster drugs, and it seems highly likely it will do so again. Moreover, the board of directors and management have moved quickly to adjust after the failure of the company's internally created GLP-1 candidate. Specifically, it acquired a company with an exciting GLP-1 pipeline and agreed to distribute a GLP-1 drug for a Chinese company if that drug gets approved.
Pfizer is not sitting around and hoping for the best; it is making decisions that it believes will position its business for a turnaround. That probably won't happen overnight, but given the business's long-term history, it seems like a worthwhile bet that it will eventually get back on the growth track. Assuming that happens, meanwhile, it is highly likely that investors will afford it a higher valuation.
Pfizer is worth the risk for more aggressive investors
If you are risk-averse, you probably shouldn't buy Pfizer until it actually has new drugs to offset the patent cliff losses that are on the horizon. Dividend investors should specifically note that the 6.6% dividend yield comes along with an over 100% trailing-12-month payout ratio. However, if you are a contrarian investor willing to own a turnaround stock, drug industry survivor Pfizer could be a good addition to your portfolio while it is still in the Wall Street doghouse.
