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Pfizer Inc.
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== Valuation == Three different methods were used for the valuation: discounted cash-flow analysis (DCF), comparable company analysis and the dividend discount model. Since Pfizer is a late-stage company which is mature, established and its dividends are relatively stable and predictable, DDM could help us produce the closest to reality results. The DDM assumes a constant or stable dividend growth rate, which aligns well with the characteristics of Pfizer. Using this method, under our base case, we found a value per share of $31.10. Thus the company is trading at a premium of 16% (market value per share right now is $36.85) compared to its intrinsic value. The assumptions taken for this method were the following: {| class="wikitable" |+ !Description !Value !Commentary |- |Stage 1 growth |2.5% |This value was selected based on the growth rate of Pfizer's dividends over the last 3 years. |- |Stage 2 growth |2% |Stage 2 growth rate represents the perpetual growth rate. It is usually between 2-3% since it ranges between historical inflation rate and global GDP growth rate. |- |Cost of equity |7.46% |The cost of equity was calculated based on the CAPM. 10-year US Treasury, average market rate of return and beta of Pfizer were all used in order to come up with this number. |} Using the DCF valuation method, under our base case, we found a value per share of $34.04. Thus the company is trading at a premium of 7.6% (market value per share right now is $36.85) compared to its intrinsic value calculated using DCF. DCF is an assumption-based model and the accuracy of those assumptions can significantly impact the valuation results. The assumptions used are included in the following table: {| class="wikitable" |+ !Description !Value !Commentary |- |Revenue growth (% change) | -30% for year 1, -20% for year 2, 0% for year 3, 10% for years 4 and 5 |The revenue growth is expected to fall by 30% for 2023, as highlighted by the company's published 10K annual report. We expect the revenue growth to continue falling by 20% for 2024 as demand for COVID-19 will keep decreasing and Pfizer's main source of revenue is coronavirus products (57% of total revenue for 2022). Then, for the following years we expect the company to develop new products and boost its revenue streams by 10%, as 119 products are in either clinical phases or registration. |- |Cost of sales (% of Revenue) |31% |The historical average of COGS as a percentage of revenue was calculated. |- |SG&A (% of Revenue) |16% |The historical median of SG&A as a percentage of revenue was preferred here, since there was a large difference between 2020 and 2022 results. |- |R&D expenses growth (% change) |10% |From 2021 to 2022, the company raised its R&D expenses by 10%. Therefore, we expect the R&D expenses growth to increase by 10% each year, since Pfizer is focusing on creating new drugs and medication and R&D is at the center of what the company is doing. |- |Acquired in-process research and development expenses (% of revenue) |2% |The historical average as a percentage of revenue was selected. |- |Amortization of intangible assets ($ millions) |$3,552 |The historical average in millions of dollars was selected. |- |Other (income)/deductions-net ($ millions) |$975 for the 1st year, and $1733 for the next 4 years |Pfizer issued $31 billion of debt on May 2023 and since it will need to pay around $1516 mil. more each year, we expect this element of the income statement to rise moving forward as it is dominated by interest expenses. |- |Restructuring charges and certain acquisition-related costs (% of revenue) |1% |The historical average as a percentage of revenue was selected. |- |Tax(% of Income before provision) |11.4% |As of Q1 2023, Pfizer's effective tax rate is 11.4%. |- |Capital Expenditures ($ millions) |$3736 mil. for year 1, $4236 mil. for year 2, $4736 mil. for year 3, $5236 mil. for year 4, $5736 for year 5 |Pfizer increased its Capex from 2020 to 2022 by $500 mil. each year, so we expect this trend to continue. |- |Accounts Receivable (Days) |46 days |The historical average of Accounts Receivable (days) was used. Accounts receivable (days) is calculated as (Accounts Receivable/Revenues)*365. |- |Accounts Payable (Days) |70 days |The historical average of Accounts Payable (days) was used. Accounts payable (days) is calculated as (Accounts Payable/COGS)*365. |- |Inventory (Days) |102 days |The historical average of Inventory (days) was used. Inventory (days) is calculated as (Inventory/COGS)*365. |- |Discount rate |7.01% |Discount rate was calculated using the WACC formula. Cost of equity was the same as before (DDM), whereas cost of debt was selected as the cost of borrowing the latest $31 billion (5% on average). Debt was calculated as short-term + long-term debt and for the equity part the current market capitalization was used. |- |Perpetual growth rate |3% |In order to calculate the terminal value, a growth rate of 3% in perpetuity was used. |} Our last method for valuing Pfizer was comparable company analysis. Price/earnings and Enterprise Value/EBITDA ratios were used. Earnings of 2022 were multiplied by the median P/E ratio of the competitors (i.e. Merck, GSK, J&J, Abbvie, Amgen, Eli Lilly). The implied market cap was $631,442 million. This divided by shares outstanding resulted in an implied price per share of $112.38 which is significantly higher than the current one of $36.85. Thus the company seems undervalued when using this method. This may mean that investors may not be fully recognizing the company's earnings potential or growth prospects, leading to a lower valuation compared to its peers. When using the second multiple, we multiplied EBITDA of 2022 by the median EV/EBITDA ratio of Pfizer's competitors. The implied enterprise value was $623,056 million. Next, net debt was subtracted and we arrived at a $587,644 million market capitalization. This divided by shares outstanding resulted in an implied price of $104.58, which is again significantly higher than the current market price.
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