Billionaires Are Buying Up Beaten-Down Pfizer Stock. Should You Follow Their Lead?

Nobody can predict the future, but it's not hard to imagine increasing pharmaceutical sales. In 2022, prescription drug spending in the U.S. climbed more than 8% to reach $406 billion. It's a lot but still less than one-third of the amount soaked up by American hospitals.

It might not feel like it when you pay the bill, but prescription drugs give healthcare systems a tremendous return on their investment. With this in mind, it's no wonder billionaires are buying up shares of one of America's largest pharmaceutical companies, Pfizer (NYSE: PFE).

In the third quarter, Jeff Yass and the Susquehanna fund he manages raised its Pfizer stake to 10.3 million shares. Igor Tulchinsky more than doubled the size of WorldQuant Millennium Advisors' Pfizer stake by purchasing 1.2 million shares.

Tulchinsky and Yass make lots of bets every quarter, and many of them don't work out. Before blindly following these billionaires, let's look at some of the reasons Pfizer's stock price has fallen about 49% since the end of 2022.

Why Pfizer's been beaten down

Shares of Pfizer have been under pressure because the company is getting close to some patent cliffs. The main patent protecting Eliquis, a drug it markets in partnership with Bristol Myers Squibb, expires in 2026.

Sales of the next-generation blood thinner are still on the rise and responsible for about 9% of total revenue. Pfizer has settled with several drug manufacturers that will hold off launching generic versions of Eliquis until April 1, 2028. In the meantime, it could lose exclusivity for Ibrance in the U.S. market in 2027.

Ibrance sales are responsible for about 6% of total revenue, and a loss of exclusivity is only part of the problem. The blockbuster breast cancer treatment is already losing market share to similar drugs from Novartis and Eli Lilly, called Kisqali and Verzenio, respectively. Sales of these competitors bounded forward, but Q3 Ibrance sales fell 10% year over year.

Pfizer's prostate cancer treatment, Xtandi, earned approval to treat early-stage prostate cancer patients in 2023. Q3 sales shot 28% higher to $561 million, but these gains could evaporate in a few short years. The main U.S. patent protecting Xtandi's exclusivity expires in 2027.

Reasons to buy

Drug patents don't last very long compared to other forms of intellectual property. Big pharmaceutical companies like Pfizer constantly funnel profits from their present blockbusters toward the next generation of products.

For example, Pfizer acquired Biohaven and its migraine headache drug, Nurtec, for around $11.6 billion in 2022. Q3 sales rose 45% year over year to an annualized $1.3 billion because it's the only treatment approved to both prevent migraines and stop the headaches after they occur.

According to Pfizer, 85% of physicians prescribing migraine headache treatments for the first time are choosing Nurtec.

Padcev, a drug Pfizer acquired in 2023, is a part of the only chemo-free treatment for bladder cancer patients newly diagnosed with advanced-stage tumors. The combination of Padcev and Keytruda is now the most prescribed treatment for these patients. Q3 sales surged up to an annualized $1.6 billion and could reach $5 billion in a few years.

Pfizer has raised its dividend payout for 15 consecutive years, but you don't need another raise to receive heaps of passive income from the stock. At recent prices, it offers a huge 6.4% yield.

Investors can reasonably look forward to another dividend bump this December. Management expects adjusted earnings to land in a range between $2.75 and $2.95 per share this year. That's more than enough to support raising a dividend payout set at an annualized $1.68 per share.

Time to buy?

Shares of Pfizer have been trading for the relatively low price of just 9.2 times adjusted-earnings expectations for 2024. At this low valuation, the stock can deliver market-beating gains even if earnings rise very slowly in the years ahead.

Losing exclusivity for Eliquis, Ibrance, and Xtandi will sting, but these patent losses probably won't prevent Pfizer from growing earnings and its dividend payout over the long run. Following the lead of billionaires, in this case, could be a smart move.

Should you invest $1,000 in Pfizer right now?

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Pfizer. The Motley Fool has a disclosure policy.