With relevance to current life science companies, the ancient Greek physician Hippocrates, often labelled “the father of modern medicine,” advised almost 3,000 years ago “healing is a matter of time, but it is sometimes also a matter of opportunity.” That counsel rings especially true for a pair of ostensibly beleaguered drugmakers, Pfizer and Merck, both of whose stocks have been battered this week despite reporting strong earnings, continuing a prolonged stretch of share underperformance for both companies even with paradoxically good revenues
These two iconic pharmaceutical firms have good company as virtually the entire pharmaceutical industry outside of the weight drug titans, GLP-1 companies, Eli Lilly and Novo Nordisk, are trading at near-record low valuations. But while they face different and unique challenges, both Pfizer and Merck stand out for the extent to which the investment community may be uniquely underappreciating their prescription for future success. For both drugmakers, investors seem to be addicted to bad news, but some good news could be exactly the antidote the doctor ordered.
Pfizer’s pharma pipeline is underappreciated outside the labs
With yet another quarter where Pfizer handily beat consensus earnings expectations, it’s even more clear that CEO Albert Bourla is already well on his way toward getting Pfizer back on track—as we presciently wrote in Fortunelast year. Not only is Bourla delivering on his cost-cutting pledges, but he is driving renewed sales stability and even impressive sales growth, with Pfizer apparently seizing COVID-19 vaccine market share from rivals such as Moderna.
That Pfizer’s turnaround is already well underway is reflected by the fact that activist investor Starboard Value, led by Jeffrey Smith, wisely chose not to nominate any dissident directors to Pfizer’s board ahead of this year’s annual meeting, an apparent vote of confidence that the company is on the right track and apparently satisfied with their constructive, mutually respectful, fruitful engagement with Bourla—for now at least.
But Starboard’s decision to “pass” is also a tacit acknowledgment that when it comes to pharma, there are no quick, overnight fixes; and as reflected by Pfizer’s stagnant stock price, current sales matter far less than pipeline excitement in driving drug stock performance. That is because drugmakers have a unique business model where they are only able to maintain the patents on their drugs for around 10-20 years before the patents expire and other companies are able to sell generic versions of the drug, known as loss of exclusivity (LoE); and thus must constantly seek out new, promising drug candidates to replace lost revenues as patents roll off the books continually, and develop those drugs through capital-intensive R&D over the span of years if not decades.
With some ~$17 billion in revenues scheduled to roll off Pfizer’s books over the next five years from LoEs, the investment community is understandably laser focused on Pfizer’s pipeline—and admittedly, while the company has already refocused its pipeline to prioritize higher return investments, Pfizer could be much more aggressive in communicating how its pipeline is already poised for tremendous success. While Pfizer management should be commended for opting for a cautious, conservative “under-promise and over-deliver” approach after being burned before, at the same time, many investors and analysts are ludicrously ascribing zero value to some of Pfizer’s most promising drug candidates, amidst widespread uncertainty and misplaced anxiety.
Here are some key facts when it comes to Pfizer’s drug pipeline, which the company ought to be shouting from the mountaintops at every opportunity and conveying clearly with quantifiable return on invested capital metrics, not only technical scientific data.
First, the financial returns on Pfizer’s $43 billion Seagen deal have already exceeded the most optimistic internal estimates, with several oncology drugs poised to become blockbusters. Thanks to the Seagen deal paired with technological advances in drug discovery resulting from AI, Pfizer is poised to become the world’s greatest oncology company, on the forefront of solving previously unsolvable cancers representing hundreds of billions in potential revenues.
Second, the returns on invested capital from Pfizer’s $11 billion Biohaven transaction have also already exceeded the most optimistic internal estimates, with Nurtec sales growing exponentially en route to blockbuster status, after some initial challenges which are now firmly history.
Third, many investors still fail to appreciate the full potential of Pfizer’s oral GLP-1 drug candidate, danuglipron, which is on the verge of advancing to Phase 3 studies and is well positioned to become the second oral GLP-1 drug to market, years ahead of competitors—and with the potential oral GLP-1 market dwarfing even the existing injectable GLP-1 market dominated by Eli Lilly and Novo Nordisk. Fourth, contrary to the myth that Pfizer can’t do R&D and business development, Pfizer’s return on invested capital across its homegrown drugs is near the top of its peer group, and management could be more proactive in quantifying that—along with its strong capital allocation track record—for skittish investors.
Of course, there are some cynics who take a “show-me” attitude, and fortunately for those cynics, a catalyst-rich 2025 will provide no shortage of potential sparkplugs, including the release of key GLP-1 danuglipron data in just a few weeks’ time on top of four regulatory decisions, nine Phase 3 readouts, and 13 pivotal program starts. But in the meantime, it won’t hurt Pfizer to sell the story a bit more to anxious investors, and it doesn’t take overpromising or idle speculation to do so. The facts, and just the facts, are enough, and plenty compelling. Sometimes, as Supreme Court Justice Louis Brandeis quipped, “sunlight is the best disinfectant.”
Merck’s keys to the future beyond Keytruda
Merck’s challenges are different from Pfizer’s, yet not without some parallels. Similar to Pfizer, the company handily beat consensus earnings expectations this week, yet its stock plummeted 10% on the news that Merck is halting shipments to China of its cancer-preventing Gardasil vaccine while rescinding and lowering guidance.
While Merck’s candor and honesty in pulling Chinese sales of Gardasil off the table is commendable, what was lost amidst the market sell-off is the fact that all Gardasil sales around the world represents merely ~10% of Merck’s revenues, a tiny fraction compared to Merck’s blockbuster Keytruda powerhouse, which represents approximately half of all of Merck’s sales—not to mention that Gardasil sales remain strong around the rest of the world ex-China.
Simply put, Keytruda is the far more important growth driver, and the story there is much more exciting. The continued soaring success of Keytruda speaks to the triumphant legacy of Merck’s former CEO, the legendary Ken Frazier, who delivered countless blockbusters during his tenure at the top from which Merck continues to reap billions, ranging from Keytruda to Gardasil to Bridion to Lynparza to Lenvima. But with Keytruda facing a LoE in 2028, Frazier’s successor Robert Davis has quietly but triumphantly developed an easier-to-use version of Keytruda 2. The new-and-improved version can be given through a simple needle rather than requiring an intravenous infusion, shortening the time required to administer it from 30 minutes to three minutes, and is poised to capture at least 40% the existing Keytruda market if not more—meaning the Keytruda expiry in 2028 may not be the Armageddon it appears to be.
Even beyond Keytruda, Davis has diversified Merck’s pipeline by tripling over the last three years the number of drug candidates in late-phase development, which represents over $50 billion in potential revenues. Merck can still grow its pipeline even more through M&A, particularly in the GLP-1 space, thanks to $14 billion cash on hand and a nearly entirely de-levered balance sheet with less than 1x debt.
Depressing investor value with RFK’s distressing science values
Of course, both Pfizer and Merck stocks have been hurt by the elephant in the room—the impending confirmation of controversial Health & Human Services nominee Robert F. Kennedy Jr., who many believe favors superstition over science.
While some speculate that RFK Jr.’s most fervent anti-vaccine instincts will be curtailed, his beliefs on vaccines are not only dangerous economically—69% of Trump-friendly major CEOs told us privately that they believe RFK’s anti-vax instincts could pose a threat to public health and the American economy—but also dangerous for public health, since the pharmaceutical industry, and vaccines, have played a leading role in improving public health and have been key drivers of extending the average lifespan of American citizens to record levels over the past few decades. In 1900, average global life expectancy was just 32 years; thanks to advances in medicine, today the average life expectancy is 72 years, and still rising, with seven previously deadly diseases near eradication, ranging from scourges such as smallpox to measles to polio.
The facts are powerful when it comes to vaccines’ proven benefits. Should RFK Jr. actually try curtailing access to vaccines, he will be confronting a torrent of opposition from across civil society. Far from playing a pernicious role, drugmakers actually play a heroic role in investing in life-saving research, with trillions spent on life sciences R&D every year to advance new drug discoveries.
That R&D takes place not only at big pharma companies—household names such as Pfizer and Merck—but also at smaller, less well-known but no less heroic biosciences startups, such as Vivek Ramaswamy’s Roivant Sciences, which has brought many drugs to market tackling everything from autoimmune diseases to inflammation to dermatology. Another one is Vlad Coric’s Biohaven, which is a pioneer in migraine treatment and neurological disorders.
Even RFK Jr.’s boss, President Donald Trump, has directed ire toward not the drugmakers, but rather the middlemen, known as pharmacy benefit managers (PBMs). As President Trump declared, “we have a thing called a ‘middleman’…that makes more money than the drug companies, and they don’t do anything except they’re middlemen. We are going to knock out the middleman.”
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Clearly, despite the battering Pfizer and Merck have taken from investors, there is more good news than meets the eye. As Jim Cramer said on CNBC today, “I am mystified…[they] are doing everything they promised and more…and that’s why you buy!” While investors might be addicted to bad news, an antidote is in order in all the underappreciated good news hiding in plain sight, as Pfizer and Merck fulfill their prescriptions for success.
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