Where Will Pfizer Be in 3 Years?

The next three years have just become a bigger question mark for Pfizer (NYSE: PFE) than they were before. There are two competing factors taking shape, one internal to the drugmaker; the other is external, even though it was expected to be a possible answer to Pfizer's internal problems.

Here's what's happening for Pfizer right now, and why investors still might want to take the long view with this high-yield stock.

The drug industry is complicated

In some ways, the pharmaceutical industry is pretty simple: You make a drug, and you sell a drug. But this isn't a simple manufacturing business, and there are a lot of subtleties that have to be taken into consideration. For example, finding a new drug to sell is a long, complex, competitive, and capital-intensive process. That's why drugmakers are given a period of time when they can exclusively sell a new drug. Revenue and profits for new drugs can be huge, but there's an end date to that revenue stream.

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The end date is what is known, in industry jargon, as a patent cliff. Essentially, when its patent ends, the revenue from a medication "falls off a cliff" as generic alternatives are introduced. Pfizer has three blockbuster drugs set to lose patent protections in 2027 and 2028: Ibrance, Eliquis, and Vyndaqel.

While patent cliffs are normal fare for a drug company, Pfizer still has to do something about the issue. After all, its income statement will feel the impact if there are no new drugs in the pipeline to make up for the lost revenue and profits. Investors are worried about what will happen, so they're down on the healthcare company's stock right now. That's part of the reason why the dividend yield is a huge 6.9%. It doesn't help the mood any that the dividend payout ratio is troublingly high at roughly 100%.

The solution became a problem

The best way to deal with a patent cliff is to have a great pipeline of new drugs in-house, so a company can just launch new drugs as revenue from older ones starts to fall off. But Pfizer's pipeline isn't particularly strong right now. The next best thing is to go out and buy another company with strong drug candidates. Given Pfizer's size -- it has a $140 billion market cap -- it's more than capable of acting as an industry consolidator.

And that's what Pfizer did, inking a deal to acquire Metsera (NASDAQ: MTSR) for an up-front cost of $47.50 per share, with three earnouts worth up to a total of $22.50 per share. The big draw was Metsera's drugs in the weight loss arena, because Pfizer's own weight loss drugs flamed out well before they even got close to getting approved. The deal was expected to close by the end of 2025, and it was a good one. It would have positioned Pfizer fairly well to deal with its upcoming patent-expiration issues.

However, Metsera has received a better offer from another drug company. Pfizer is now taking Metsera to court to force the deal through. Legal issues like this are time-consuming and expensive, and have uncertain outcomes. What was expected to be a pipeline solution has now become another problem for the company to deal with. And that ramps up the uncertainty about its outlook for the next three years, the window for the big upcoming patent expirations.

What Pfizer can do, versus what it's done

With such a high payout ratio, investors have to worry about the risk of a dividend cut. But if you view Pfizer as a turnaround story and not a dividend stock, the outlook is a bit less troubling, so long as you think long-term. While Metsera has become a headache, Pfizer's ability to quickly ink a big deal is really a testament to its capabilities. Even if it doesn't pan out as planned, the company can find another acquisition candidate. And then there's the internal pipeline of drugs which should, eventually, produce more winners.

Sure, the next three years could be a bit challenging from an investment point of view. But if you think in decades and not days, Pfizer is a proven survivor -- and it clearly has the ability to make big moves. Buying while the stock is unloved right now could be a good plan, assuming you don't mind the near-term uncertainty.

Reuben Gregg Brewer 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.