The Pfizer Fillip

Two years ago, Pfizer was in the doldrums. Thanks to its Covid vaccine, now the pharma company is gushing cash, writes Jake Mulcahy

When pharmaceutical giant Pfizer released its Q3 results in 2019, the company emphasised the virtues of becoming smaller. It had announced earlier that year that it was spinning off its generics division, Upjohn, which housed former blockbuster drugs whose patents had expired – most notably erectile dysfunction pill Viagra. The division had dragged down revenue growth and masked the solid performance of its main BioPharma division.

In the executive commentary, CEO Albert Bourla promised steady earnings growth as the generics division was spun off and the company focussed on promising new drugs and therapies for ailments of which few people had ever heard.

Two years later, Pfizer’s Q3 2021 results were a blockbuster affair, thanks to a malady that everyone has heard of: Covid-19. The virus and Pfizer’s miracle vaccine ensured that the company’s shrinkage was shortlived. Pfizer’s three billion doses of its Covid-19 vaccine were worth an estimated $36bn in revenue through 2021. In the nine months to the end of September 2021, total company revenue increased by 48% and earnings improved by 40%, compared to the same period in 2019.

There has been a distinctly ambiguous impact on its profit margins. Pfizer’s gross margin has fallen from around 80% to 65%, while its normalised net-income margin has increased to about 21%. This is because Pfizer jointly developed the vaccine with German firm BioNTech, and therefore earns 50% of the profits on sales of the vaccine.

The fillip from the vaccine looks set to continue for at least the next year or two. Half the world’s population is fully vaccinated, and Covid variants mean booster shots could become as regular as flu jabs. Production and efficacy issues with competitor vaccines, in particular AstraZeneca and Johnson & Johnson, mean that Pfizer is now the vaccine of choice for governments across the globe, outside of China.

Even if regular booster shots aren’t necessary, most experts predict that Covid won’t disappear completely, and that countries will require antivirals or other treatments to relieve the pressure on health systems during winter surges.

In this area, Pfizer is stealing a march on its competitors. The company has developed an antiviral drug, Paxlovid, to be taken within five days of infection. The pill is straightforward to administer, and the reported 85% efficacy is significantly higher than the closest competition, Merck’s antiviral drug, Molnupiravir.

Pfizer has already secured a contract worth $5.3bn to supply the US government with 10 million courses of Paxlovid, implying a price of $530 per treatment. The company is currently negotiating with numerous other governments about further contracts, probably helped by

the fact that most world leaders have CEO Bourla’s number on speed dial.

Even though Pfizer has waived its IP rights over Paxlovid in 95 developing countries, analysts at Bloomberg reckon that the drug will generate revenue of between $8bn and $25bn for Pfizer in the coming year.

Pfizer’s runaway success with its suite of Covid-19 treatments is attributable to both luck and smart decisions. The company was lucky to have a partnership with BioNTech, given that the German startup actually developed the vaccine. Pfizer was a relative minnow in the vaccine market pre-Covid, with its pneumonia vaccine, Prevnar, generating about 11% of 2019 revenue.

Pfizer was also fortunate that its Covid vaccine proved effective. Merck’s Covid vaccine used the same mRNA technology as Pfizer’s, but was abandoned due to poor trial results. On the business side, it proved savvy for Pfizer to refuse government subsidies for vaccine development. Where other pharma companies like AstraZeneca sold their vaccines to governments at cost, Pfizer was under no ethical obligation to reciprocate government largesse with a low price.

Industry insiders also observe that Pfizer has a long-standing reputation for driving a hard bargain with governments over drug pricing. It is testament to that reputation that Pfizer secured a price of around $19.50 a dose for its Covid vaccine – five times higher than the price charged by AstraZeneca – in most Western countries, even before any efficacy results were known.

However, the scale of production to which Pfizer has managed to ramp up was neither lucky nor inevitable. The mRNA technology and coldstorage features of its vaccine make it a complex product to manufacture and distribute. A well-developed contract manufacturing network, and flexible in-house production facilities, enabled the company to meet the exacting demands of the global vaccination race.

Pfizer has not been without its critics through the pandemic. The company’s insistence on liability protection in state supply contracts rankled some commentators. Pfizer has responded by committing to delivering two billion vaccine doses to low- and middle-income countries by the end of 2022. It has cut the price to a range of $6.75 to $11 for poorer nations, although Pfizer has raised prices for rich countries like Ireland.

‘Pfizer’s runaway success is down to luck and smart decisions’

Pfizer is riding the crest of the Covid wave, and the company is targeting 6% compound annual sales growth between 2020 and 2025. High hopes centre on Eliquis, used to prevent blood clots, and Ibrance, used to treat breast cancer. Sales of the latter have begun to level off after poor trial results and competition. Safety concerns around another highgrowth drug, Xeljanz, further complicate the growth ambition.

The prospects for Pfizer’s pipeline of new drugs in clinical trials or seeking regulatory approval are also uncertain. The acquisition of Array BioPharma signalled a greater focus on oncology treatments, but this is not reflected in the pipeline. These concerns explain why Pfizer’s share price has mostly underperformed the market in the past year. That has begun to change recently, as investors consider the potential of Paxlovid to generate cash flows in the long term.

As the world-leading manufacturer of mRNA vaccines, Pfizer is also in pole position to capitalise on the technology. Malaria, HIV, cystic fibrosis, and hepatitis B are some of the diseases against which an mRNA vaccine could be effective, and where all other vaccine types have failed.