Many of us ask is Big Pharma making money each time we see our prescription receipts. Strangely, Mr. Market places little faith in Big Pharma’s ability to make money.
Pfizer Inc. (NYSE: PFE) stock was trading at just $34.96 a share on 21 August 2019, for instance. However, Pfizer is making a lot of money from its drug sales.
For example, Pfizer reported a gross profit of $10.688 billion on revenues of $13.264 billion on 30 June 2019. Meanwhile, Pfizer generated an operating income of $4.14 billion and a net income of $5.046 billion from those drug sales.
Pfizer makes a lot of money from Drugs
In contrast, Pfizer reported an operating cash flow of $2.611 billion and a free cash flow of $2.023 billion for the quarter that ended on 30 June 2019. Moreover, Pfizer reported $12.912 billion in cash and short-term investments on June 30, 2019.
Therefore, Pfizer makes a lot of money from its drugs. Notably, Pfizer reported $11.128 billion in short-term investments and $1.784 billion in cash and equivalents on 30 June 2019.
Thus, Pfizer is a cash rich company, which many will consider a value investment because of its low stock price. Big Pharma’s incredible unpopularity in America only adds to the value case for Pfizer.
To clarify, classic value investors look for cash rich companies that are unpopular and unfashionable. As a pharmaceutical house in 2019, Pfizer Inc. (NYSE: PFE) is both.
Pfizer reduces business, recalls drugs
Interestingly, Pfizer is going through a rough stretch, the company sold its consumer health business to GlaxoSmithKline plc (NYSE: GSK), FiercePharma reports. Additionally, Pfizer plans to merge its Upjohn patented drugs business with Mylan NV (NASDAQ: MYL).
Moreover, Pfizer is recalling 40 milligram (mg) tablets of RELPAX® (eletriptan hydrobromide) because of possible microbiological and bacterial contamination, a press release states. In detail, lots AR5407 and CD4565 of the migraine treatment RELPAX are being recalled.
However, Pfizer Inc. Is still the largest pharmaceutical maker in the world with 5.6% of the global drug market in 2018, Pharmaceutical Technology estimates. However, Pfizer is the second largest pharmaceutical maker in the United States, behind Johnson & Johnson (NYSE: JNJ), Market Research Report estimates.
Thus Pfizer is still a value investment with a dominant market position despite all the problems. Pfizer’s market share could shrink; however, with the recent sales and mergers.
Is Pfizer a Good Dividend Stock?
I think Pfizer is a good dividend stock because management scheduled a 36₵ dividend for 3 September 2019. Moreover, that dividend grew by 2₵ in 2019 rising from 34₵ in December 2019.
Plus Pfizer offers dividend investors nine years of dividend growth, a dividend yield of 4.16%, an annualized payout of $1.44, and a payout ratio of 48.2%, Dividend.com reports. Thus, I believe Pfizer pays a high dividend for the low stock price, $34.94 on 21 August 2019.
There could be a little trouble for Pfizer on the horizon because revenue growth shrank by 1.5% in the quarter ending in June 2019. Conversely, I do not think the shrinking revenues will threaten the dividend.
Should Investors stay away from Big Pharma?
On the other investors need to leery of Big Pharma in today’s political environment. In fact, politicians on both sides of the aisle are attacking pharmaceutical makers.
Notably, the US federal government will require pharmaceutical makers to reveal drug prices over $35 in future television ads, The New York Times reports. Notably, this policy only covers drugs financed by Medicare & Medicaid, federal health insurance for the elderly and the poor.
U. S. Health & Human Services Secretary Alex M. Azar II hopes exposing the price tag will force companies to cut the cost of prescription drugs. To clarify, Azar and his boss; President Donald J. Trump (R-New York), could believe exposing high prices could reduce the demand for drugs. Such exposure could have little effect on prices because some form of health insurance covers most Americans.
Will High Drug Prices Destroy Pfizer?
Oddly high drug prices could threaten Pfizer because publicity about sky-high prescription costs fuels political pressure for drug regulations.
Xeljanz (Tofacitnib), a rheumatoid arthritis and psoriatic arthritis medication from Pfizer can cost up to $4,840 a month, The New York Times claims. However, GoodRx, lists a $2,200 to $2,300 a month price for Xeljanz with manufacturers’ coupons.
Xeljanz is controversial because a U.S. government agency the National Institutes of Health (NIH) financed its development with tax money. Thus, Pfizer will face more political pressure and regulation.
Is Medicare for All a Threat or an Opportunity at Pfizer?
Drug prices could also increase the pressure to for Medicare for All; single-payer health insurance, in the United States. Notably, 49% of likely Democratic primary voters back presidential candidates who claim to support Medicare for All, the July 29, 2019, Emerson Poll estimates.
In detail, 20% of Democrats back U.S. Senator Bernie Sanders (I-Vermont), 14% of Democrats support U.S. Senator Liz Warren (D-Massachusetts), 11% of Democrats want U.S. Senator Kamala Harris (D-California), 2% of Democrats support Andrew Yang (D-New York) and 1% of Democrats back U.S. Representative Tulsi Gabbard (D-Hawaii). All of those candidates voice support for single payer.
Moreover the July 2019 NPR/PBS News Hour/Marist Poll estimates 70% of Americans support Medicare for All. Under these circumstances, I think efforts to implement Medicare for All are likely because of its popularity.
Unfortunately, the reality of Medicare for All is unknown so we do not if Medicare for All is a threat or an opportunity for Pfizer. On the positive side, Medicare for All could increase the market for Pfizer’s products by giving all 329.093 million Americans health insurance. WorldoMeters estimates the US population was 329.093 million in 2019.
On the negative side, Medicare for All could lower Pfizer’s profits by cutting drug prices. Thus, Pfizer could have a bigger market but make less money.
In the final analysis, I believe Pfizer is a good value and dividend stock that comes with some serious risks. Thus I advise long-term investors to be leery of Pfizer (NYSE: PFE).