Pfizer Just Made a Landmark Drug Pricing Agreement with President Donald Trump. Is the Stock a Buy?

Key Points

• Pfizer’s revenue soared in early pandemic days thanks to its coronavirus products -- but demand for them has since slipped.

• The company has taken steps to boost growth in the coming years and just this week tackled problems that have weighed on investor appetite for the stock.

• 10 stocks we like better than Pfizer ›

The biggest risks facing pharmaceutical companies in recent times haven't had to do with clinical trials or winning regulatory approval. Instead, investors have worried about President Donald Trump's intention to lower drug prices and slap a tariff on pharma imports. These two efforts could weigh significantly on these companies' earnings -- and uncertainty about when and how they would be rolled out prompted investors to think twice about buying shares of drugmakers.

This week, though, one company in particular took a step to remove the uncertainty. Pfizer (NYSE: PFE) became the first drugmaker to strike a deal with Trump on pricing, and in return won exemption from import tariffs for three years. Shares of the pharma giant took off, rising 14% in two trading sessions.

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Considering this landmark drug pricing agreement with the president, is Pfizer stock a buy? Let's find out.

Pfizer's record revenue

Before diving in, a quick note on the Pfizer story so far. The pharma giant is the maker of the top selling coronavirus vaccine and a handful of other blockbusters across treatment areas. Those products helped the company reach a record of more than $100 billion in revenue back in 2022, but since that time, Pfizer has struggled with declining demand for its coronavirus vaccine and treatment and upcoming patent expiration of key products.

At the same time, though, the company has taken steps to address these challenges, such as launching a cost realignment plan, bringing to market several new drugs, and benefiting from its recent acquisition of oncology biotech, Seagen, to boost its position in cancer treatment.

All of this should help Pfizer gain momentum and potentially enter a new phase of growth within the next few years as cost savings kick in and new products start boosting revenue. Pfizer recently said it expects more than $7 billion in cost savings by 2027, and the company has said non-coronavirus new launches should generate $20 billion in sales in 2030.

But the unknowns of import tariffs ahead and any potential order from the U.S. to slash drug prices represented an ongoing weight on the company and the stock price. Until Pfizer chief Albert Bourla and Trump agreed to a deal a few days ago.

Details of Pfizer's agreement with Trump

Here are the details:

• Pfizer agreed to lower prices of "the large majority" of its primary care treatments, with an average reduction of 50%. Some price cuts are up to 85%. This is to match the pricing of these drugs in other developed nations.
• Pfizer agreed to launch new medicines at prices that are on par with other developed markets too.
• Patients with prescriptions will be able to access these drugs through a direct purchasing platform.
• Pfizer agreed to invest further in U.S. manufacturing and says it's earmarked $70 billion for research and development as well as capital projects.
• In return, Pfizer won exemption for three years from import tariffs.

(The U.S. has a pharmaceutical trade deficit of more than $115 billion, according to research by The Motley Fool. Pfizer is one of the U.S. pharma giants that has set up some operations in Ireland, a country with significant pharma exports to the U.S.)

Is the stock a buy now?

Now, let's return to our question: Is Pfizer a buy after reaching this agreement with Trump? It's important to note that the price cuts cover many primary care drugs that can be sold across a direct purchasing platform but don't apply to more complex -- and costly -- drugs such as oncology treatments, for example. And following this announcement, Pfizer didn't lower earnings guidance. So, it doesn't look as if this move will weigh on Pfizer's financial picture -- and it removes the risk of a potential drastic decision on drug pricing from the government.

Meanwhile, the exemption from import tariffs clearly eliminates a possible earnings headwind. Trump planned on imposing a 100% tariff on pharma imports, though he's paused the implementation of this as negotiations with other drugmakers are ongoing.

All of this means this deal with the U.S. is fantastic news for Pfizer as it erases key risks without hurting earnings potential. At the same time, Pfizer's stock remains cheap, trading at only 8x forward earnings estimates even after the recent gain. And that's why now is a great time to get in on this stock -- and potentially win as Pfizer enters a new era of growth in the coming years.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.