Pfizer Inc. (PFE) Earnings Call Transcript & Summary

Good afternoon. I'm Chris Schott at JPMorgan, and it's my pleasure to be hosting a fireside chat today with Albert Bourla, Chairman and CEO of Pfizer. So Albert, happy new year. Thanks for joining us.

Great to be here. Thank you very much.

I know you want to make some opening remarks, and then we can jump into the conversation.

Yes, I can do that. But first, I want to say that last time we met was in this place, the 2 of us, just before COVID. So how many things have changed since then?

Really amazing.

It's unbelievable, which sets also the stage for some opening comments that I want to do. What I want to discuss, it is what is the future of Pfizer in the post-COVID crisis? And I'm using on purpose the post-COVID crisis era because I don't think that COVID is stopping this year. In fact, I think that COVID will remain for the next multiple years, a serious health issue, and as a result, will be a big part of our R&D line that we are going to invest, and it's going to be an even bigger part in our revenue line. So although our revenues from COVID in both treatment and vaccines will go down, clearly, will remain both of them, each one of them, the 2 largest products of Pfizer in the long run. But the business clearly has 2 components. And the only distinction between the 2, it is that one is way more predictable, which is the non-COVID business. This is a business, all of us, us, you, everybody there, can model way more -- way easier because we have benchmarks, we have analogs. And then there is the COVID which is more uncertain because the assumptions if the disease will exist, what would be the treatment rate, they don't have a precedence. So I'm going to try to isolate the 2. And the first and only slide, if I can have the next slide, please. Please read all of this in our website, then we can speak. I'm going to start with the non-COVID business. And this is a graph that more or less we put out during our last quarter's earnings. And this is basically the growth strategy of Pfizer and why we believe that it's going to be a very strong growth strategy. In 2020, we set a goal that our business will grow at 6%, starting from '19 as a baseline. If you see the midpoint of our guidance that we gave for the end of '22, we will give a real number. In a few weeks, we must be around $44 billion. This is the midpoint. The $44 billion in constant exchange rate is exactly 6%. This $44 billion of non-COVID business, which is exactly at 6%, will continue growing at 6% all the way to year '25. And we are very confident about it. So which means that if you do the math, that in year '25, the non-COVID business, excluding business development, should be at $52 billion, which is the first graph that you see there. However, most of the analysts were in line with these expectations. Some were saying it's 5%, some were saying is 6%. Now I think everybody goes closer to the 6%. But the challenge that we're raising was that after '25, you are facing a very big cliff of LOEs that basically will take away all the growth prospects that you have. And that's why we try to build this graph to demonstrate how the situation will go. Indeed, between '25 and '30, we estimate that we are going to lose $17 billion because of products that will go LOE. The analyst expectations about this number is pretty much the same. They think $18 billion. We think $17 billion. With the consensus that I'm reading, it is $18 billion. In the next 18 months are the most important 18 months in the history of Pfizer because we are going to do something that has never done before. We are going to launch 19 new products and indications. Most of them are new products, and some of them are indications -- new indications of existing products. Those collectively starting from now all the way to the mid of '24, we estimate that will produce revenues of 2030 of approximately $20 billion. The analyst expectations on that is, surprise, surprise, slightly lower. So they are at $16 billion from that, but there are not huge differences between the 2. Following that, we made a commitment. We put a goal out there that we are going to purchase through the extraordinary firepower that we are having, projects and science that will deliver eventually, products that will deliver $25 billion of incremental revenues by year 2030. So far from this goal of $25 billion, we have achieved 40% of it in the first year of implementation. We have approximately, with the 4 acquisitions that we did, $10 billion. The analysts think that the $10 billion is $8 billion, by the way, as I think the same thing. So they are all hard cutting it a little bit. And then post that 18 months of launches, we have an entire pipeline that is maturing and is going to give launches that will occur in the second half of '24 and in the year '25, '26, '27, '28. Products that are included in this box over there, which we call X, are GLP-1. And it is the gene therapy portfolio. We have 3 projects that are in this X category. And we just announced results from one. We have the vaccines against Lyme. We have vaccines against shingles. We have all the combination vaccines between COVID and flu; COVID, flu and RSV; flu and RSV. We have multiple oncology launches, et cetera, et cetera, et cetera. We have made estimations occasionally for each individual products, but they don't quantify it here in this box how much those are because they are a little bit earlier. I'm sure that the difference between us and analysts will be even bigger. But what is the punchline here? That if we will be able to execute in our plan of delivering $25 billion of revenues and $20 billion of business development and $20 billion of risk-adjusted revenues through the launches that we are doing, we should be reaching a situation that we will have a growth that will exceed the 6% benchmark that we set in the beginning of '20 all the way to '25. So our revenues should go comfortably between '25 and '30 at the 6%. And based on the success of the pipeline, could easily exceed the 10% mark. And those are the numbers. Of course, if we make 6% from $52 billion all the way to '30, that means $70 billion. If we make 10% from $52 billion all the way to '30, $84 billion. So this is the growth story of Pfizer, and I believe it is pretty well derisked. The $20 billion, they don't have any technical risk other than the flu product that we haven't seen yet significant results. All the other big components of the next 18 months launches have been derisked technically, at least, so there's only the commercial risk. And the $25 billion, we have invested so far, $26 billion to buy revenue of approximately [ 10% ], which gives us a very good value for money and a good rate of 2.6x revenues through our acquisition. So with that, I feel that the non-COVID business is very, very solid. Do you want to discuss that and then...

Let's do that. Absolutely. A lot on COVID. So as one of the questions I have, I totally -- I mean this framework is very helpful to, I think, help contextualize not only your organic business, but how you think about putting capital to work. But I guess I always get concerned if I see a company putting a revenue target on acquired assets and that I just -- this idea of like how do you ensure attractive returns on the business. Now so far, I think we certainly like the deals you've done, it seems like the Street's like the deals you've done. But how do you think about the risks that get introduced by incentivizing the organization to be looking at a revenue target versus just looking at returns on transactions?

More or less you gave the answer to that, but I will elaborate on that. It is -- many people advise against setting a goal about that. One, it is because that makes you accountable and then you need to deliver. So be careful before we set a goal. But we felt very comfortable that we plan and we will deliver, and we wanted to be accountable against that. But the second was exactly what you said. Many people will say, if you put a goal, you give the impression to the Street that you are after a number. So in order to make your number, you're not going to be disciplined in allocating the capital. And I knew this risk. And I took it and indeed, people talk to me like that. But however, then, we did one after the other. And the 3 big acquisitions that we did following this announcement, because [ revival ] was very small, in each one of them, the stock went up, in each one of them. So each one of them received the confirmation if you're going to the Street, that it's a good allocation of capital. We like what you did. So this is less of a concern now. Still, I think it is there. So I'm sure that everybody of you will be looking at us next year, this year, actually, and we will see how we deploy, what will be our next move. And we will see how much of that $25 billion we can achieve to start with, and what is the means of achieving it? Is it 2.6? Or it is different numbers? Is it good value for money? So everybody will be judging us on that. If we wouldn't put that number there, people wouldn't have this discussion that we are having right now ourselves that you need to count when you value Pfizer's stock, the firepower that the company has developed that it is a different link than basically any other pharma company right now in the industry, which is a significant advantage that is not counted unless if you translate it to something tangible, which is billions by 2030 revenue and CAGR.

On the BD front, if I think about those 3 bigger deals we saw in 2022, is that a good proxy for how you'd envision capital allocation for Pfizer going forward? So I guess the question is, were those kind of unique assets? Or can we think about either deals skewing larger or smaller? I'm trying to get a sense of kind of what's your sweet spot right now for M&A?

First of all, sizes, we are agnostic to size. We can execute big. What we don't want is to execute big business development of the typical we buy another pharma company and then we give a high premium to the shareholders of the other company, and then we cut costs so that we can justify the premium. That is not going to happen. Why? It's not because it's bad strategy in general, right? But it is a bad strategy for the time of the company. Look at that in the next 18 months, we are launching 19. And in the next 18 months, we are having a significant R&D pipeline, but it is developed. Do I want to shut down research centers, shut down manufacturing sites and reallocating reps because we are reducing the field force? No, I don't want to do it. So it's not good for the company right now. But if it is a biotech of a large size, it could be part of that. But when you see the targets out there, I would say that there are 3 distinct groups. One, it is some usual suspects, few big biotechs that usually, they have few products and a very big pipeline. Usually, they are very expensive. And they are very expensive because there's a lot of value in their platform, the mRNA platform, for example, something like that. This is a lot of money to get a company like that, but has the benefit that it comes a significant chunk of revenues in 1 transaction. And also, it's very expensive in terms -- that comes with a lot of R&D cost. Then there is a middle level, which is companies like more or less the ones that we did, which is they're having 1 leading asset that it is quite developed, maybe before registration, maybe just after registration, and then a follow-up molecule that looks very promising. Arena was the same. Biohaven was the same. They are coming with less R&D expense, which doesn't affect your leverage as a result, and they are immediately accretive in most of the cases. And the question is if you get them in a good price so that you can add value either through your bigger commercial presence, your ability to manufacture, your ability to develop the follow-up molecule faster. And then there is a third, which are smaller in size biotech, they don't have any product yet, but they have platforms. Those are very cheap to buy compared to how much you pay in terms of molecules, see if everything is relative in America. But it's relatively cheaper. I don't think that to make the $25 billion, and then also continue growing further, we can do it by focus on only one or the second or the third quarter. It's going to be a portfolio of all 3 with different, of course, size. So far, was mainly the middle level. But it's going to be a portfolio that will derisk it as a result. And will likely aim nonrisk adjusted more than $25 billion, so risk adjusted will be $25 billion.

Okay. That makes a lot of sense. Maybe just on the core business growth itself. I know you're targeting 7% to 9% top line growth for 2023 ex your COVID business. Can you just elaborate on what are the biggest drivers of that growth we should expect this year? And if I kind of break it into how much of that's core, how much of that's new launch, how much of that's acquired revenue.

Yes. It's coming -- you are right. We almost gave guidance, 7% to 9% for the non-COVID business. And we are going to give the official guidance in -- but will not be any different numbers than that, right. We're not going to change our mind in a month. The driver, it is approximately 1/3 of this, let's say, 9% growth, comes from already launched products, 1/3 comes from business development-acquired products, and 1/3 comes from newly or about to be launched next year from our own pipeline products. It's almost 1/3, 1/3, 1/3. If you take out -- that's very indicative. If you take out the business development, the remaining is exactly 6% as we have promised. Always will be, which means the in-line products plus our own pipeline that we are launching.

All right. And then I think with that, you talked about OpEx stepping up and that you're making investments to support these new launches. Should I think about this as a multiyear increase in expenses? Or is this more of a onetime kind of rebasing of OpEx and then we can think about maybe slower growth going forward?

I would say it's rather the second. Let me explain. Look, we are in a unique situation. No other company, including us, have ever launched 19 products in 18 months. So it's a very big thing. And you need to do it right because the future of our company, it is so successful, we are going to execute. So just look at these bars. Clearly, in order to support 2020 -- excuse me, the $20 billion expectations of new product launches, we will have to make sure that we have enough [indiscernible]. Already, we restructured, months ago, our commercial operations. So they are already and better aligned with this new portfolio that is coming, and we are going to offer resource those launches. I'm not going to take any chances. Then let's go to the last one, which is all these products that they are continuing now with R&D. We have very high expectations for those products. And I just said some of that, in addition to all the flu and mRNA type of things that are happening, and they are not included there. So R&D is to go up to support the game this point there. And then the third is, of course, we're going to progress from the 10 that we are now. Let's say, I don't want to give a number, but we are going to progress significantly towards the goal of $25 billion. And that could come with more or less R&D expense because we're not buying just products, right? We are buying also projects. So with all of that in mind, to support this plan next year and the year after, but especially next year, we would have a significant number of expenses that should not be needed, and that we are [ post ] those launches, which is where the vast majority of the expense goes when we launch new products.

So we kind of have this window where that steps up and then as top line continues to grow, we can think about that investment kind of...

Actually, they should divert. The top line should continue to grow. But because -- exactly. We did all of that 1 big chunk, so you should expect big top line growth because 19 products is driving, not 3 or 4. And also big -- also more stabilization of expenses in the outer years because you are out of this extraordinary situation that you are investing to support 19 launches altogether.

Yes, that makes sense. I know you hosted a broad late-stage pipeline day in December. I guess just maybe taking a step back, just the thoughts on the overall state of the pipeline at this point. I think it's something we're talking about ahead of time of how much the company has changed going back from last time. We're sitting here in 2019, it just kind of -- it's a lot of progress. So just talk a little bit about how the R&D portfolio as a whole and just R&D within Pfizer has changed over the years and how comfortable you are with the business here today.

Yes. To assess that, you need to assess, first of all, with some of the current benchmarks metrics that we are using to assessing this. As you know, all of us, all the companies participate in benchmark studies, but we are giving very detailed numbers of our R&D productivity, and then they are coming to results. We are standing out as one of the best most-productive R&D machine right now. We are having the best success rates. Our success rates, end-to-end, from first in humans all the way to approval, is around 22%, and that's 5, what, years rolling, right? So it's difficult to change measure. The same measure for the industry in this benchmark is 11. So double the success rate. When it comes to time to complete from first in humans all the way to approval, we were able to take out almost 3 years in the last 3 years, 2.6 to be accurate, right? We were at 9-point something and we are at 6-point something now in terms of how long it takes. And we are very pleased about that. That's why we are so encouraged and we keep investing in our R&D machine so that to have these -- because we believe the return will be very high. Now you don't measure metrics, you measure revenues. And if we arrive, that will give us $20 billion. It's a very phenomenal productivity of R&D. And the fact that we are launching 19 products in the next 18 months says that we did something well in the last 4 years. So in general, I believe that we are in a very good state. And as I said, the next 18 months is not everything we have. I just listed the things that are not included there. And there are multiple, multiple projects that are triggering the attention of everyone. So I feel very good about our R&D productivity.

When I look across the pipeline, what are you most excited about when you think about what's coming to market? And what do you think is most underappreciated in the portfolio?

First of all, I try to understand what is the most unappreciated. When I see we have 20, they have 16, what is going on? And a lot of that comes that a lot of the analysts, they don't forecast all the way to '30, frankly, right? So we have a number. You, for example, I think you go all the way to '27 most in your numbers, right?

We're getting there. We're getting there.

You're not because you want to be accurate, and everybody's way more accurate and more, let's say, professional when he can defend what he says. So a lot of the discrepancy comes in that outer years. And now there are some that we think is more than others. The one that I think is the most underappreciated, it is the elranatamab, which is our lymphoma. I believe when we see the data that it is best in class. And we are coming, of course, now early next year -- early this year, I'm sorry, we changed the year, with a new launch for a category of triple refractory, which is a smaller indication, but we have 8 -- 6 indications in 8 pivotal studies running right [ now ]. I think that could be a double-digit blockbuster. Now we will see how things will evolve. But that's one clearly. GLP-1, clearly, everybody is excited about that. I believe that it is something that could -- we said that we think it could be $10 billion product for us in a market that could be $90 billion. So it's not part of this calculation, but it is a major upside if we get it right. Again, we think that we'll be very few players that will play in the oral GLP-1, us and Lilly. Clearly, we are going to be one of them. We think the data should show which one has a better profile. We believe and we hope that we will have. But no matter what, it's going to be so big a market that it's going to be a very big product for both of us, I think. Also, the mRNA vaccines, because, of course, we speak about -- I was hearing Stephane before speaking about the potential of mRNA. And I get what everything you said that can have on flu, but also how that can unlock the combination products, flu and COVID, flu and RSV, and how that can unlock dramatically the utilization of COVID or of RSV because with the combination product, you can immediately [ raise ] it into the flu utilization, which is 50% in these countries. So very, very big. So these are some of the very exciting opportunities.

Yes. Can I just go to a different one, RSV. You had some very interesting data as to the second half of last year. How do we think about that market developing as kind of a new kind of vaccine coming to the space? There's obviously a lot of RSV in the news these days, but talk a little bit about market development of that asset.

I don't think it's rocket science. It's very standard, and we have seen this type of markets developing with other diseases like Prevnar, like pneumococcal. I think there is a component which is a pediatric component, how to protect the infant, and we have come with a very revolutionary way, which is doing maternal immunization. You -- let's say, you immunize the mother and it's passing the protection to the baby in the first 6 months. The results were very good. So we are expecting approval based on that. And then there's another market which is the adult market. And the adult market in RSV is going to look more like flu rather than pneumococcal because pneumococcal creates immunity almost for life. We have it -- it's once in a lifetime in the adult. Although we are looking at it right now to see after 5 years you need, but it's very long, right? I think COVID is very short, flu is very short, and RSV likely will be the same. So a combination product of the 3, particularly when, in this country, there is no copay for any vaccines by law based on the new IRA that was voted effective January 1, no matter in which plan you belong, if you are commercial or Medicare or Medicaid. If a product, a vaccine -- if a vaccine is recommended by ACIP, then the 0 copay for patients. So people will be going to get their flu shot and they will be presented with the options you want through flu and RSV and COVID. The question will be how much it costs. They will tell you 0. I think you will do 3. So it's very clear.

They kind of build on each other as you can...

I think. That's why I said it's very important because right now, if you see the booster market of COVID, it stabilized around 30% utilization rate. So around 30% of the people did booster. Let's go with 30% in this, let's say, last -- the fourth booster. The Omicron or not Omicron, but fourth booster, right? So if you take that as a goal, I don't think we need to go to crazy calculations. But a 30% booster with 1 -- between 1 and 1.5 doses like per individual because some other people will do 2 or 3 during the year, is giving you a certain number. If you combine it with flu, this 30-plus will go to 50%. So a step growth that would unlock significant value.