Pfizer: A Reliable Dividend Stock in Pharma
German chemist Charles Pfizer immigrated to the United States in 1848. One year later, the 24-year-old and his cousin co-founded Charles Pfizer & Company using a $2,500 loan from Charles' father to buy a red brick building in Brooklyn, New York.
Pfizer's early days were spent manufacturing fine chemicals, which enjoyed a boom in demand following the Civil War. Then, in 1919, Pfizer pioneered the mass production of citric acid from sugar using a fermentation process.
Pfizer's citric acid was used in beverages produced by Coca-Cola and other drink makers, driving a strong period of demand growth as soft drinks gained in popularity. But Pfizer's fermentation technology proved most valuable in World War II as the firm became the first large-scale producer of penicillin, an antibiotic used to treat Allied soldiers.
Following the war, a decline in penicillin prices drove Pfizer to look for more profitable antibiotics. This set the stage for Pfizer's transformation into a research-based drug company. In 1950 – roughly 100 years after the company's founding – Pfizer's first proprietary pharmaceutical product launched.
The company hasn't looked back. Fueled by acquisitions, international expansion, a fast-growing salesforce, and the development of blockbuster products such as antidepressant Zoloft and erectile-dysfunction drug Viagara, Pfizer became the largest pharmaceuticals maker by the turn of the 21st century.
Pfizer has since increased its focus on prescription medicines by shedding its other segments, including its animal health business, consumer health products, and off-patent medicines division.
As a result, Pfizer today generates nearly all of its profits from developing and marketing patented drugs. This business offers the potential for faster growth and higher margins. But the pharma industry is also riskier, given the substantial costs and high failure rates associated with developing breakthrough medicines.
Even blockbuster drugs eventually lose patent protection and see their cash flow plummet as competitors flood the market with lower-priced offerings. The business can encounter financial pressure if a drugmaker fails to commercialize or acquire enough new products to offset these revenue declines.
This situation happened to Pfizer when its cholesterol drug Lipitor was set to lose patent protection in 2011. Lacking a pipeline of new medicines to offset this looming sales gap, in 2009, Pfizer paid $68 billion to acquire Wyeth's drug portfolio and slashed its dividend to help fund the purchase.
This payout reduction broke Pfizer's streak of paying higher dividends yearly since 1968. Fortunately, the company's current portfolio of medicines is more favorably positioned with no significant concentrations (excluding transitory Covid-related revenue) in any single drug or treatment area, diversifying risk.
The firm also does not have any major patent expirations through 2025, and Pfizer's investment-grade balance sheet has the capacity for acquisitions to help keep the pipeline filled with promising medicines.
While pure-play pharma companies must contend with patent cliffs, blockbuster flops, and industry pricing concerns, Pfizer's enormous financial resources, technical know-how, well-diversified portfolio, and global salesforce position it well in this otherwise defensive sector.
Pfizer's early days were spent manufacturing fine chemicals, which enjoyed a boom in demand following the Civil War. Then, in 1919, Pfizer pioneered the mass production of citric acid from sugar using a fermentation process.
Pfizer's citric acid was used in beverages produced by Coca-Cola and other drink makers, driving a strong period of demand growth as soft drinks gained in popularity. But Pfizer's fermentation technology proved most valuable in World War II as the firm became the first large-scale producer of penicillin, an antibiotic used to treat Allied soldiers.
Following the war, a decline in penicillin prices drove Pfizer to look for more profitable antibiotics. This set the stage for Pfizer's transformation into a research-based drug company. In 1950 – roughly 100 years after the company's founding – Pfizer's first proprietary pharmaceutical product launched.
The company hasn't looked back. Fueled by acquisitions, international expansion, a fast-growing salesforce, and the development of blockbuster products such as antidepressant Zoloft and erectile-dysfunction drug Viagara, Pfizer became the largest pharmaceuticals maker by the turn of the 21st century.
Pfizer has since increased its focus on prescription medicines by shedding its other segments, including its animal health business, consumer health products, and off-patent medicines division.
As a result, Pfizer today generates nearly all of its profits from developing and marketing patented drugs. This business offers the potential for faster growth and higher margins. But the pharma industry is also riskier, given the substantial costs and high failure rates associated with developing breakthrough medicines.
Even blockbuster drugs eventually lose patent protection and see their cash flow plummet as competitors flood the market with lower-priced offerings. The business can encounter financial pressure if a drugmaker fails to commercialize or acquire enough new products to offset these revenue declines.
This situation happened to Pfizer when its cholesterol drug Lipitor was set to lose patent protection in 2011. Lacking a pipeline of new medicines to offset this looming sales gap, in 2009, Pfizer paid $68 billion to acquire Wyeth's drug portfolio and slashed its dividend to help fund the purchase.
This payout reduction broke Pfizer's streak of paying higher dividends yearly since 1968. Fortunately, the company's current portfolio of medicines is more favorably positioned with no significant concentrations (excluding transitory Covid-related revenue) in any single drug or treatment area, diversifying risk.
The firm also does not have any major patent expirations through 2025, and Pfizer's investment-grade balance sheet has the capacity for acquisitions to help keep the pipeline filled with promising medicines.
While pure-play pharma companies must contend with patent cliffs, blockbuster flops, and industry pricing concerns, Pfizer's enormous financial resources, technical know-how, well-diversified portfolio, and global salesforce position it well in this otherwise defensive sector.
