Pfizer’s stock has declined from 47.90 EUR to the current 26.50 EUR in the course of 2023. The world’s largest pharmaceutical company is witnessing a 45% loss in market value, not only erasing gains from the COVID rally but also wiping out the entire decade’s profits. Currently, Pfizer’s stock is trading at the 2013 level.

Is the sell-off not exaggerated? Despite the downturn, Pfizer remains one of the most lucrative dividend payers in the S&P 500, boasting a yield of 5.6% after the recent plunge. Compared to other S&P 500 members, the dividend is expected to be well secured.

What’s Behind the Sell-off?

The decline is attributed to the fading COVID business, leading to write-offs of 5.6 billion USD. Pfizer miscalculated and overproduced vaccines, with demand now trending close to zero. Although COVID is in the past, Pfizer’s core business is expected to grow by 6-8% this year. While the write-off is frustrating, it does not pose a threat to the substance of the company. Ultimately, the write-offs result in lower reported profits, leading to reduced tax payments for Pfizer.

The true causes of the sell-off lie in expiring patents. In 2020, when Lipitor, then the world’s most profitable drug, lost its patent, Pfizer’s revenue dropped from 67.8 to 48.9 billion USD in the subsequent years. Surprisingly, during that period, the stock gained value as the market believed in Pfizer’s innovation. As history shows, the market was correct, and both revenue and profit ultimately reached new highs.

However, current market sentiment seems to lack trust. Despite Pfizer’s diverse product portfolio, the market appears skeptical. The real danger lies in the expiration of crucial patents in 2026 and 2027, potentially resulting in a revenue loss of up to 20 billion USD from the loss of patent protection for Prevnar, Eliquis, and Xtandi.

To counter this, Pfizer urgently needs research successes to replace declining business. According to the company, it already has promising products in the pipeline, with Etrasimod touted as a potential blockbuster for treating chronic bowel diseases. Pfizer has a total of five drug candidates, each with the potential to generate over 500 million USD in annual revenue.

If Pfizer can achieve its targets, it would more than compensate for losses from expiring patents – the most likely scenario. Expectations for the fiscal year 2024 are optimistic, anticipating a return to normalcy as the COVID business dissipates, making Pfizer’s performance easily comparable.

Outlook for the Fiscal Year 2024

Significant cost-cutting measures are also underway, with costs expected to decrease by 1.0 billion USD in the current fiscal year and an additional 2.5 billion USD in the next. Whether this is fully reflected in consensus estimates remains uncertain.

The current assumption is that Pfizer’s core business will achieve a record profit of 3.18 USD per share in the coming year, approximately equal to 18.0 billion USD. Pfizer has yet to provide a forecast, but it is evident that profit estimates exceed the previous consensus.

Pfizer is a strong contender for a turnaround. In 2019, Pfizer achieved an operating profit of 17.5 billion USD. Assuming no increases in revenue and profit in the core business since then (contrary to available financial reports) and factoring in the 3.5 billion USD in savings, Pfizer should achieve an operating profit of 21 billion USD in 2024.

Adding interest income, with Pfizer having cash reserves of 44.2 billion USD, could bring in around 2 billion USD next year. If Pfizer’s valuation returns to its usual level, this would result in a target stock price of 48-50 USD per share.