Description

I was going to write up Moderna as a short but since someone beat me to it, I’ve been pondering whether to go with Pfizer. PFE’s downside isn’t as significant but after giving thought to recent events, I’m increasingly convinced it’s also a good short.

My objective is to do this without delving into divisive arguments about whether a certain therapy T should be given to a person P to address a certain condition C. Instead, the goal is to simply predict how the players in this situation are likely to behave.

Consensus today is that Pfizer is a blue chip. The stock seems pretty fully valued, like other mega-cap stocks. My view is that Pfizer has inadvertently entered a high-stakes political poker hand in which its intrinsic value is exposed to significant impairment, kind of like when the GSEs decided to dabble in higher risk paper. If it loses this hand, I believe there will be a decline in consumer demand for PFE’s products, a decline in the prospects of favorable deals/partnerships with other pharmaceutical companies and certainly a deterioration of its relationships with governments, which is important because governments are essentially Pfizer customers as well as arbiters of whether Pfizer products are allowed in the market.

What is this high-stakes hand? Well, over the past 2 years the company has taken advantage of a market opportunity in a way that caused the word ‘Pfizer’ to enter everyday vocabulary. As such, the Pfizer brand as a whole is now subject to the ongoing judgment of society at large. In my research, I found that many members of the public would hesitate before consuming another Pfizer product P2 if their therapy T was proven dangerous; even the rest of the pharmaceutical could take a hit under such a. In fact, in many people’s minds, the Pfizer brand has lost lots of value already, and so the downside scenario is already playing itself out to some extent.

An examination of the company’s position relative to Phil Fisher’s 15 points exposes multiple weak points that are useful in evaluating the company’s prospects. I will start by discussing the brand and then I’ll go through the 15 points.

Brand Issues

Before 2021, Pfizer had a benign brand image, similar to other large pharmaceutical companies: the company name was mostly used by financial market participants, by the medical/pharma community in the course of day-to-day operations, by certain members of the population who were using Pfizer products. For all other people, Pfizer was mostly a name they may have seen in its various advertisements.

Let us now compare that with Pfizer’s brand positioning as of this write-up, at the end of 2021. Today the word ‘Pfizer’ is pronounced (i) by more people than ever before, say at least 50% of people outside of Asia and (ii) for very different reasons than it was pronounced before. This and other company names like ‘Moderna’, ‘Astra-Zeneca’ and ‘J&J’, have entered the vocabulary of the average person as a way to refer to just 1 product from each of these companies. It is unusual that the name of the company, and not the product itself, is used in reference to the product. For example, when someone uses the #1 rated condom, they say “I use Trojan”, not “I use Church and Dwight”.

This raises the stakes from a branding point of view for all of these drug makers. If the effort to mass-deploy inoculations goes smoothly, people will love the drug makers in question and these companies’ brand value will be perhaps increase. However, should a scandal occur, the equities could suffer more than they would have if all the chain of events would not have taken place (kind of like FNM and FRE securities during the housing bubble) because people may swear off these companies. To contrast with the condom business, if tomorrow there’s a scandal involving Trojan condoms, sales of Arm & Hammer shouldn’t be impacted that much.

And so the question of course is: will there be a scandal? Is there one already? Where do things stand? Again, we shall avoid fanning the flames of ‘debate’ and simply state what is observable. From the perspective of one group of people, everything is going well so far. Many are making appointments for more inoculations; perhaps also proceeding with the younger age ranges. But there’s another large group who sees the situation quite differently. For that group, a scandal is brewing already and for them the Pfizer brand has negative value.

Consider for instance the following Pfizer Tweet sent on November 10, 2021 with comments disabled:

There were multiple replies from people visibly mocking and/or angry at the company; here’s a couple of examples:

Two things occurred here that reflect poorly on Pfizer’s brand value: (i) disabling comments is considered weak brand-wise (ii) the company was, in social media parlance, “ratioed” as result of their post. For a definition see https://www.urbandictionary.com/define.php?term=ratioed

One question that comes to mind is: why would Pfizer feel the need to post such a thing in the first place? The company isn’t out-of-favor with Wall Street and the stock is making highs. One potential answer: it may simply be that someone in the marketing department got bored, and that this is an isolated incident, not indicative of what the people at the top are feeling. We’d need something else to corroborate thisAh… but here’s something from one day before:

https://www.cnbc.com/2021/11/09/covid-vaccines-pfizer-ceo-says-people-who-spread-misinformation-on-shots-are-criminals.html

Speaking with Washington D.C.-based think tank Atlantic Council, Bourla said there is a “very small” group of people that purposefully circulate misinformation on the shots, misleading those who are already hesitant about getting vaccinated.

“Those people are criminals,” he told Atlantic Council CEO Frederick Kempe. “They’re not bad people. They’re criminals because they have literally cost millions of lives.”

So now we know it’s all the way at the CEO level and not an isolated case.

Let's analyze what Bourla is saying. He employed the word ‘purposefully’ when talking about what he qualified as a “very small” group. It seems he believes there's: (i) a very small group of people spreading misinformation on purpose and (ii) another group, this one quite large, that believes and perhaps further spreads that misinformation without knowing that it is wrong.

My research, on the other hand, suggests the number of people who are spreading [ what Bourla defines as ] misinformation is very large. Furthermore, my months-long mapping of who are the different players here suggests with quite some certainly that he’s wrong about this idea of two distinct groups (one small evil + one large unsuspecting). There appears, in fact, to be only one, large, decentralized group of people purposely spreading [ what Bourla defines as ] misinformation. Furthermore, that group seems to be composed of curious types who go out of their way to seek information (which is consistent with the fact that the information in question is harder to come by). So I didn't find any kind of systematic top-down misinformation-spreading from a small group to a large group. I've seen, if anything, the opposite: it seems that the information that is, let's call it "pro-taking-inoculations" is the one that is passed from a small group to a large group, via much more visible channels, including billboards, well-funded print/video media outlets, speeches by people with a high political rank, PR material produced by various institutions and other methods. Let me create two charts to make sure this whole part is clear:

Why is this significant to the thesis? Because the red denotes people who will indefinitely distrust the Pfizer brand. In Bourla’s view, that red group is "very small" and the yellow group, who are so far listening to the red group, might change their mind and consume Pfizer products at some point if they can be convinced to do so. He obviously believes that his products are safe and effective, so if he also believes in the maxim that “the truth always ends up rising to the surface”, he must also think that it’s just a matter of time before many in the yellow group find out that truth. This is why he only reserves disparaging comments for his “very small” red group. He doesn't want to insult future consumers.

By contrast, my research suggests a different set of realities. I have found almost no one that fits the description of a member of the yellow group, and instead I see one large red group that self-identifies as the target of comments such as Bourla’s. They openly identify themselves as spreaders of information – good information, in their view – and they are very offended when hearing such comments. I’m pretty sure a vast majority of them believe Bourla doesn’t really believe the yellow group exists (i.e. from their point of view he knows full well there’s just one large red group and he's bothered by it because it spreads good information in a manner that may undermine Pfizer’s business objectives). According to my estimates, the red group includes something like 20% of Canadians, 40% of Americans, 60-70% of Romanians, perhaps 90% in some African countries. And the size of the group is only growing. When you look at how many people in Israel got the 3rd jab vs. how many got the first two, it's clear that people are seeing something that makes them hesitate.

What's interesting is that Bourla's analysis doesn’t offer any answers as to his red group’s motives; for example: he doesn’t claim that they make money from doing this. On the other hand, my analysis does suggest a motive: the vast majority of people that I've seen/met from the red group say it's to ensure their health and that of their loved ones, and also their rights as citizens. Whatever their reasoning, these people believe that the risk-reward of consuming these inoculation products is unfavorable for them. A good amount of these people, perhaps half, would hesitate in future times if their doctor prescribed any other Pfizer-made product, and they’d engage in deep, independent research before walking into the pharmacy and getting it. And many have lost trust in phamacists too This is new territory. Investors and analysts in pharma stocks are not accounting for that possibility. Imagine a never-before-seen scenario where researching drugs independently will be ‘a thing’. Videos online reviewing drugs; podcasts disucssing how different people felt when taking certain drugs, and what natural remedies can act as an alternative; people compiling databases; crowd-sourcing their own research essentially. Just as with investments, where content creators who have no accreditation say what they want in their podcast and simply add “do your own research, I’m not a financial advisor”, people can do that for food and drugs. Another important point is that this sort of thing is a 1-way trend. Pharma companies will never regain the red group’s trust, plus the group keeps growing every time a person gets an - alleged or real - reaction R from a therapy T, and every time there’s another piece of research that says something bad about some product.

I also want to comment on Bourla’s behavior more generally using what we’ve learned about various CEOs over the years. I don’t think it’s a stretch to say that it’s a red flag when a CEO shows this type of emotion. Usually we see CEOs lashing out at shorts – that’s bad enough. Getting angry at some of your potential consumers is a whole new ball game. And this is especially weird given the company and its stock have been doing relatively well. Let’s try to deduce a scenario that would explain such behavior. Perhaps something on the horizon threatens PFE’s future results? Maybe a stream of negative information (either true or false information) about the company’s products? If so, the strength of this stream would have to be rising, perhaps uncontrollably, to an extent the company’s PR department feels is tough to match. That would lead them to freak out and make bad impulsive decisions; perhaps a tweet that backfires; or maybe the whole thing leads to a CEO comment that is a bit agressive. Everything we know about branding points us in the direction of “risks ahead”.

Information.. Misinformation.. Where Who What When and How?

So one might ask – where’s the meat? Where’s this massive amount of information (or misinformation, depending on one’s point of view) that is being shared on purpose by the big red group? What is the stuff Pfizer is lashing out at that will destroy its brand? Well, I will give just a single example because there’s so much out there that I think it’s more powerful to give one and let the reader estimate the size of the rest. Most VIC members have probably been spending some time over the past 2 years on this. Here’s the example I chose; keep in mind that Bourla would qualify both the interviewer and interviewee as criminals: https://www.youtube.com/watch?v=vIydr2ZqZto

Phil Fisher’s 15 Points

So since it seems PFE is missing at least one ingredient of greatness (basic PR skills for a 200B market cap company) let’s try to see if they have deficiencies elsewhere, using Phil Fisher’s 15 points.

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

The potential depends on what happens to their brand as discussed above.

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

For sure.

3. How effective are the company’s research and development efforts in relation to its size?

Well, that is uncertain. Recently, whilstleblowers (and not fake ones) have come out about sloppy practices either at Pfizer or at certain contractors. So under a normalized scenario where they and the FDA tighten up procedures, it’s possible that total R&D ends up being much higher. We don’t know where the industry is going.

4. Does the company have an above-average sales organization?

Very complicated to answer. The basic answer until now was yes but when government is a big client, sales personnel includes lobbyists and even bureaucrats, including public officials, and so many other people who are just following a given direction. If someone completes a sale where there’s potentially no repeat business (due to consumer disappointment) is that a good sale? For example, some countries will not continue to purchase in the future as much as they have until now.

5. Does the company have a worthwhile profit margin?

Well.. I think overall yes, but the answer kind of overlaps with some of the answers above.

6. What is the company doing to maintain or improve profit margins?

Not sure. It is possible that they are cutting corners. How much? Don’t know.

7. Does the company have outstanding labor and personnel relations?

Almost for sure not. See recent whistleblowers. There’s got to be at least a bit of drama internally given the high stakes of the current situation.

8. Does the company have outstanding executive relations?

Same answer,

9. Does the company have depth to its management?

If they do, I don’t think it’s being put to full use. I’d wager Pfizer is the kind of place that has a hierarchy based too much on power and not enough on competence. And to the extent that some people could (maybe) quit because of how they feel about the company’s entry into the business of selling therapies under EUAs in highly a volatile political environment, that would impact the depth. The good people leave first when stuff is sketchy.

10. How good are the company’s cost analysis and accounting controls?

Probably like other companies its size.

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

Ya, obviously. Many big pharmaceutical companies of comparable size are not selling inoculation-based therapies for condition C. Why? Is it that they couldn’t do it or that they [partially perhaps] don’t want to? Either way, PFE is now busy with this particular line of business, and that takes resources away from other lines. The competition doesn’t have this situation. Is that a liability or an asset? Time will tell but if the PR situation turns south, it’ll be a liability.

12. Does the company have a short-range or long-range outlook in regard to profits?

Well.. the answer will only be fully available when we know more about how the company made decisions during 2020. This is the sort of stuff that comes out in bits and pieces over time.

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?

No.

14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?

The overall answer is probably yes given the current PR situation.

15. Does the company have a management of unquestionable integrity?

No. It is questionable actually.

So overall on the 15 points I’d say (i) there’s a good number of negatives and (ii) it also depends on the current situation where they’ve gone really fast (at warp speed, I believe!) and perhaps climbed on a tree that’s too high for them to climb off of. Again, very similar to the GSEs in the early-mid-2000s but an accelerated version.

What I Think may Happen

There are two scenarios. Scenario 1 is that everything goes relatively smoothly with the current efforts around inoculation-based therapies. I don’t think the upside is much more than what’s already priced in. Scenario 2 is that things don’t go so smoothly, and here’s how I think that scenario would look like:

- Based on current events it seems political winds are changing directions (OSHA mandate overturned, for example) and historically when that happens, momentum builds in the other direction

- The number of people who will want to take more of therapy T for themselves or their children is likely to be smaller than the uptake so far. If less people take it, it’s harder to implement mandates. So the number, and the political strength of, people who oppose mandates would then likely to grow. Any new information about Pfizer’s operations or interactions with various actors would be a negative for the brand.

- Any sort of stories about negative secondary effects of Pfizer-made therapies would by then take center stage and the sentiment toward such therapies rapidly flip, just as in 2007 there was a rapid flip in the institutional media from not even saying the word ‘bubble’ on TV, to suddenly talking about it like “that huge housing bubble we just had”.

- The company’s guidance would likely to come down based on adjusted sales forecasts. Analyst estimates should decline as well.

- Politicians (whether through real or theatrical anger) will have an incentive to go with this new trend and include the name ‘Pfizer’ in a negative way in their discourse. There may also be congressional hearings if any scandal arises. This is when the brand may start eroding more.

- Negative sentiment toward inoculation-based therapies should, at that point, augment the volume of the conversation around all competing concepts, especially ones that have been repressed. These include: natural immunity, herd immunity, supplements, sunlight, early treatment of respiratory illnesses and more. This global conversation could then potentially grow into a larger (at that point, perhaps exaggerated) conversation in the form “pharma vs. natural” (it’s a simplistic false debate.. but humans are not so good at nuance). At that point the entire sector sees lower valuations.

- Any revelations about any lack of rigor at Pfizer and/or some of its partners may increase the intensity of these trends.

- At that point, some patients who are taking various other types of Pfizer-made products may lose faith in them, stop taking their meds and seek alternatives. Some people will simply swear off pharma products altogether.

- The company at that point would benefit from a name change and perhaps also from spin-offs of certain products/divisions.

- If the company is bashed from all sides and its name is synonymous with ‘bad’, various economic or political actors may seek to extract as much value from PFE. It is true that Pfizer has legal immunity from the effects of the recently-promoted therapies. However, it is not immune from criminal investigations, nor from attacks by other pharma companies who didn’t participate in the latest bonanza, nor from attacks in the (new or legacy) media. Any political actors affiliated with Pfizer are likely to come under attack as well and leave the company hanging. The company at that point starts to lose political clout. Possibly, political actors choose to gang up on only a small set of inoculation manufacturers so that they can keep their connections with other drug makers. Links between PFE and people in government (and others who participate in health-related policy-making) are broken.

- Eventually the world is better exposed to the company’s way of doing business end-to-end: discovery, development, trials, partnerships, sales, marketing. Consumers will want to know more about any drug in which Pfizer had a hand in developing. A crisis of consumer confidence can ensue. Of course, there may also be loss of confidence in agencies that are supposed to protect the public like the FDA, CDC or NIH. If that happens, there could be even a mandatory review of several drugs (dosage, when to prescribe, what the risks are) that already have their license. These drugs could be chosen on a political basis, so players that are politically expendable may suffer more. Pfizer may be on top of that list, as opposed to, say, a Merck or Sanofi.

- With these types of events, the total addressable market of the company (or its parts, if by then there’s a break-up process) is likely to be lower than current estimates. In that scenario, there’s lots of prospective M&A in the sector but acquisition prices are likely to be low relatively to what they would have been before March of 2020, given there would be lots of assets for sale at the same time. Think early-2000s telecom.

In the above scenario, the company ends up doing quite poorly on Phil Fisher’s 15 points and total value would surely be lower than the current market cap, especially in light of the recent rally.

I’m not here to tell anyone whether PFE deserves this or not. I’m simply here to say that many people are angry, many people hate Pfizer right now, and historically I don’t think that bodes well for a blue chip company.

Valuation

I think currently the stock is fully-valued so there is more downside than upside, I’d say somewhere in the 20-60% range. Perhaps 20% if people reject the idea of more doses and sales simply slow down without a crisis, and 60% if there’s a crisis. One also needs to note there’s a dividend to pay while short.

Risks

- Very high inflation (risk for most short ideas)
- Company further strengthens its position globally by cementing yet stronger relations with global governments and using various tactics that lead to more sales of its inoculations

In order to hedge against these two risks with one stone, you can go long a basket of similar stocks that you feel do not have a particularly harsh downside. That means: blue chip, near-monopolies, strong connections with global governments, revenue growth thanks to these connections. Just a random selection off the top of my head: JPM, MSFT, BLK, and perhaps more simply: other mega cap pharmas who do not make inoculations for condition C.

Catalyst

- Politics playing out - I think lots will happen in the next 6 months

- More people opting out of inoculations. More people having secondary effects from inoculations that they personally find unacceptable. More information-spreading online that is negative for Pfizer.

- I forgot to mention Pfizer’s latest treatment drug that was announced very recently. I don’t know what to make of it. Some people think it’s simply a race to be leaders in what will inevitably be a world where people don’t want inoculations, or for poorer countries. I’m surprised Pfizer is actually participating in that market. I don’t want to opine on this yet. Merck is in the race too. And some drugs already on the market are also helpful. To the extent that any treatment cannibalizes inoculations, it might impact the thesis in the right direction as well, or it might not. That part needs to be monitored..