What Pfizer's New Deal Means for Healthcare

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Morningstar, where data speaks. When you look at drug prices and their costs, typically in the United States, our costs and prices are higher than other parts of the developed and kind of, you know, rich world. There's many reasons for this., but given the complexity, just forced price controls are not going to really change things materially.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Evan Siegerman. He's the head of healthcare research at BMO Capital Markets, and in a moment we'll hear from him about why Pfizer stock jumped so much this past week and about drug prices and a new website called TrumpRx.gov and what it means for investors. We'll also say a few words about the government shutdown and about what I'm calling the Suspicious 8, stocks in the S&P 500 index that yield more than 6%. Listening in is our audio producer, Alexis Moore. Hi, Alexis.

Hey, Jack.

You hear that sound? That eerie silence? That's the sound of the government being shut down. That's not really how that works, but it happened, Alexis. We're in it right now. We're shut down. I mean, not we, the government is shut down as we speak. And the stock market is not demonstrating the effects of it. I'm not seeing a lot of financial fallout in markets. Of course, this is deeply concerning to anyone who has a job that's affected, that sort of thing. I'm not terribly worried for right now, but I reserve the right to panic later. Is this like your 10th government shutdown in your lifetime? Wait a second, let's not date me by government shutdowns. If you must know, there have been, well, let's see, I'm looking at some facts provided by Jeff Buckbinder. He's the chief equity strategist at LPL Financial, and he says there's been 21 government shutdowns since 1976. So I've been through at least 21 of them, I guess. Wow. Yeah, I'm at least 21 shutdowns old. There's a lot of lovely nitty-gritty that Jeff supplied about how shutdowns work. Congress has to pass 12 appropriation bills that need to be signed by the president. There are 12 appropriations subcommittees that handle them. If any one of the 12 don't pass, the government shuts down, and so on. But basically, this is something similar to the debt ceiling standoffs that we have every so often. I describe those as fiscal chicken. The two parties get in a standoff and they try to back each other down with the threat that if someone doesn't do something soon, then something might go haywire in financial markets. It's basically politicians threatening each other with my well-being being the stakes. Thanks for that. With a debt ceiling standoff, there's the threat that government won't be able to pay its bills. With a government shutdown, non-essential services close. Some things stay open—law enforcement, power grid maintenance, air traffic control. Those are deemed essential services. But, for example, the first Friday of every month, we're supposed to get jobs numbers that are supplied by the government, and investors use those to extrapolate how the economy's doing. And we didn't get them this Friday because the group that provides them is shut down. And investors are a little concerned about that because jobs numbers have been trending in the wrong direction. There's actually a ton of moving parts these days with job numbers. There have been big revisions, questions about whether enough companies are responding to the surveys to make them accurate, claims by the president that the numbers are rigged, and now we have a missed jobs report. So what investors are doing is they're patching together pieces of data from other groups, you know, some of them private groups that have narrower jobs reports or basically other signs about how the economy is doing. I know this sounds like it could produce big trouble for financial markets. Those 21 shutdowns that we've had since the mid-'70s, on average, the stock market during those shutdowns has gone up. Barely by 0.11%. It's been positive about 52% of the time. Basically, markets tend to shrug it off. They seem to be doing that again this time. I'm just going to say what I always say about the debt ceiling standoffs is the fact that markets have historically shrugged it off, that can embolden the participants to dig in their heels. If they think, well, markets aren't going to do anything, so we might as well stick with our position, then maybe things go on longer than they have to. And then maybe markets do react. In other words, markets tend to shrug it off until the time comes when they don't. But we're not there yet. I don't want to minimize the issues that the shutdown is about. It has to do with healthcare funding and what government should pay for, and that matters to a lot of people. But I don't think investors need to be overly concerned just yet. I'm not a politics expert, but I think what happens next is that this goes on until one side begins to feel like the American public is blaming it more, and then it gives in, and then we get a deal. I'm not sure if that's political science or maybe like, um, 7th grade lunchroom power dynamics, but hopefully we get a reasonable outcome soon. That's enough politics. Anyone want to hear about big dividends? Ooh. I heard a big dividend fan in the back. This is not a moment when big dividend yields are in plentiful supply. The S&P 500 yields 1.1%. Skimpy. That's the lowest since the dot-com bubble a quarter century ago. Part of that is because of swelling stock valuations, but part is because companies are hoarding cash. Dividends have recently been 36% of profits. That's about 20 percentage points below their long-term average, according to an analysis by the Hartford Funds. I looked recently at the S&P 500 and I saw 8 stocks yielding over 6%, and I want to run quickly through them now, but I want to tell you upfront, buying stocks just for big dividend yields is not an advisable investment strategy. A yield of over 6%, especially now, is a sign that a company might be struggling or that investors are worried about a payment cut. Or both. Me running through these giant dividend stocks, that's mostly just an act of morbid curiosity on my part. But dividends themselves are a good idea for investors. Let me explain. If I want to make dividends sound like they don't matter, I just point to the stock market's current yield, 1.1%. No big whoop. If I want to make dividends sound like they are all-important, then I take a very long run of returns, and I look at the contribution of compounded dividend payments. When people take their dividends and reinvest them into more shares, that's compounding. And if you give compounding long enough to run, it becomes more important than pretty much anything else in the room. For example, since 1960, reinvested dividends for the S&P 500 have contributed 85% of the index's cumulative return. Okay, so the current yield, I think, understates the importance of dividends. The long-run contribution of reinvested dividends, I think, probably overstates their importance. So what if we look at the contribution of dividends by decade? Hartford did this and they found, for example, in the 2010s, dividends made up 17% of returns. Okay. So far in the 2020s, it's down to 12%. But this has been a period of a rip-roaring run for the stock market that's been dominated by growth stocks, many of them with smaller dividends or no dividends. When we look at the average contribution of dividends by decade since the 1940s, it's 34%. And I think of all these numbers we could latch onto, that's a pretty fair one to keep in mind. Dividends matter. Now, that might matter a lot more if you believe that stock valuations today look ambitious, stretched. And if you think that that means that returns going forward will be lower than average. In past decades where we had generally poor returns for stocks, dividends mattered a lot. They were 67% of total returns in the '40s and 73% in the '70s. So I think it's a good idea to buy dividend-paying stocks, but don't just grab after the biggest yields you can find. Research by Wellington Management has found that stocks with moderate yields have tended to beat high yielders over the long run. And Ned Davis Research points investors toward rising yields especially. From 1973 through last year, stocks with new or rising dividends returned 10.2% a year on average. Pretty good. Stocks with stagnant dividends, 6.8%. Not as good. Nonpayers, only 4.3%. And dividend cutters or quitters, those were slightly negative, 0.9%. There are plenty of cheap index funds that go after stocks with rising dividends. If you don't need current yield, Vanguard Dividend Appreciation, the ticker is VIG, that yields about 1.6%. Rising dividends are the main focus there. If you want more current income, Schwab US Dividend Equity, that yields 3.8%, and that includes dividend growth as a factor in the stocks it selects along with other signals of financial strength. The ticker there is SCHD. So those are sensible ways to go after dividends, but enough level-headedness. Let's run through those gigantic yields. LyondellBasell is the biggest yielder in the S&P 500. It pays 11.3%. Yikes. It's a chemical company and there's a glut in something called polyethylene, which is used in everything from packaging to cars. Free cash flow estimates for LionDell this year are well below the cost of its dividend. JPMorgan says that it doesn't think that LionDell has reached the bottom of the cycle, and it says that a dividend cut is not out of the question. LionDell rival Dow cut its payment in half in July. Next, UPS, United Parcel Service, yielding 7.8%. There's a tariff-related demand slump, and UPS is walking away from billions of dollars in low-margin business from Amazon. It's also cutting headcount and closing facilities. Analysts call it the biggest capacity reduction in the company's history. Raymond James says that it thinks that will provide leverage when the economy picks up. Management last quarter characterized the dividend as, quote, rock solid strong. I'm not going to include management comments on the dividend payments for all these stocks because while I don't disagree with UPS's take on its own dividend, I've never really seen a company say the opposite. I've never seen a company say, this dividend payment looks beyond shaky, and if we can't put out this sewer fire of a business model we're running, we're going to have to slash this thing. They usually say, we understand the importance of the dividend and we're taking steps to safeguard it until business conditions change enough where they stop saying that and they cut the dividend. You see what I'm saying? I don't think that management comments on dividends are particularly informative. But rock solid strong sounds like the kind of thing that should be written in all caps with a couple of exclamation points and maybe a biceps emoji. So we'll see what happens with UPS. Two food companies are on the list. Conagra Brands recently yielded 7.3% and Kraft Heinz 6.1%. Kraft did slash its dividend back in 2019. Profits for both of these companies are sliding. The packaged food business has been struggling. With inflation, their consumers trading down. We've talked about the rise of small insurgent brands. What was that chocolate bar that I used as an example of this? Tony Chocolonely. And Alexis, what's the name of that weird soda? It's got like just a drop of like vinegar in it. So it's Poppy. Poppy. They got bought. Yeah. So insurgent brands are out there taking share and making it tougher for big food companies. And I don't see a ton of commentary yet about the obesity drugs and the effect on the packaged food market, but I think it matters that millions more people are curbing their appetites each year. Anyhow, Kraft Heinz has a plan to re-split. It says it's going to keep the dividend spending the same. I'm not clear on how separating mac and cheese from Lunchables is going to get the business going again, but let's see. I'm going to skip REITs, real estate investment trusts. Those are in the business of turning rents into dividends. But just know that there are 2 in the S&P 500 that yield over 6%. They're Healthpeak Properties and Alexandria Real Estate Equities. And they both count drug companies as their customers. I mentioned that because there is a drug company on the list, Pfizer, that recently yielded 6.3%, and that was after a 2-day price jump this past week of 14%. We're going to hear more about Pfizer in a moment and what happened that investors liked. There's been concern about a government pricing crackdown, but now we have a little more clarity there., and investors seem cheered. Evan from BMO is going to tell us about it. Altria is on the list. That's the company that sells Marlboro cigarettes in the U.S. We heard recently from Philip Morris International on this podcast. They have a lot of growth in smoke-free products, which is the one we're supposed to say, Alexis, smoke-free or smoke less. They seem very particular about that. Smoke-free. Smoke-free. Don't call it smoke less. It's smoke-free. Altria does have nicotine pouches and some other things. They don't have as big of a smoke-free-less business as Philip Morris. And UBS warns that the company is using big price hikes on cigarettes to offset some pretty steep volume declines there. But Altria stands out on this list. It's one of two names that have gained more than 30% this year. So I guess investors like what's going on with the nicotine pouches. UBS is saying, watch the cigarettes. Ford is the other stock that's up more than 30% this year. There was a tax credit for electric vehicles that expired last month, and a lot of customers were rushing to buy vehicles ahead of that, and Ford benefited from that rush. That stock recently yielded 6.1%. And we've got one more on our list, and that's Verizon. I wrote a column where I basically pointed out that it and AT&T have traded places in popularity. AT&T used to be on this list as one of the highest yielding stocks in the U.S. market, but now AT&T's price is up 84% over the past 2 years. So investors with dividends have made 106%, and now the dividend yield has been pulled from suspicious territory down to a more credible level, 4%. Verizon yields 6.4%. The bull case on the company is that it's growing nicely in fiber broadband and it's working to stem its share losses in wireless service. The bear case is that I wrote somewhat bullishly about Verizon a couple of months ago in Barron's, so I probably jinxed it. And those are the Suspicious Eight. The median dividend yield of this group is 6.3%. If you buy a stock with a 6.3% yield and the share price goes nowhere, it stays the same, you double your money from compounded dividends over 11 years. But again, don't do it. Not the best dividend strategy unless they all go up over the next year, in which case I definitely told you so. Let's take a quick break. And when we come back, we're going to hear from Evan at BMO about drug prices and Pfizer and TrumpRx.gov. It's the hottest.gov website since— hang on, looking at a list of random.gov websites here— wizard.gov. Which redirects these days to Treasury Direct's Paper Savings Bond Calculator, which I guess used to be called a wizard. Probably caught some blowback from the wizard lobby. We'll be right back. Data is everywhere. When orchestrated properly, it sings. At Morningstar, We analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

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That's hbs.me/breakthrough. Welcome back. I keep seeing reports that drug stocks look cheap, but they're cheap for a reason. For example, here's UBS at the end of September. They point out that price earnings ratios for drug stocks are 24% below their norm., and what it calls pharma value stocks are the cheapest they've been since 2010. It says that earnings momentum has been much better than performance, and it calls that an unusual decoupling. It also points out that pharma typically outperforms when credit spreads rise, given very low leverage. So if you're worried about the economy or a big downturn, maybe pharma's the thing. But in this report, UBS said that it prefers healthcare equipment for now. It wrote, the elephant in the room remains. If branded drug prices in the US went to European levels, the NPV, net present value, of pharma would fall about 24%. Only generic prices are lower in the US in general than in Europe. It goes on to write basically that there's a lot of things we have to learn first before UBS is ready to sound the rally horn on drug stocks. But we did learn a couple of those things maybe this past week. President Trump announced a new deal with Pfizer. Patients who don't have insurance are going to be able to buy some Pfizer drugs at discounts through a new website called trumprx.gov. To me, it sounds like how Lilly and Novo Nordisk today make their obesity drugs available to patients who don't have insurance through special websites that they've set up. The drugs are discounted by half or more from their full list price. Since drugs are unique things and the list prices are somewhat arbitrary, you always wonder what kind of a discount is this? What's it discounted from? Anyhow, investors seem cheered by this announcement. Pfizer stock, as I mentioned, jumped 14% over 2 days. The government says it's negotiating with other drug companies. There are critics. Our friends at The Wall Street Journal wrote an editorial titled America's Pharmacist in Chief. It points out that there are sites that already do this, like Mark Cuban's Cost Plus Drug Company. The Journal's editorial board writes, why does the federal government need to become a drug marketer? Doesn't it already do enough? Not very well. Ouch. So the deal with Pfizer is that Pfizer gets a 3-year reprieve from 100% tariffs on imported drugs. In return, Pfizer is going to give Medicaid what's called most favored nation pricing. In other words, it's going to sell drugs to Medicaid at a price that matches the lowest that's paid in the developed world. And you've got TrumpRx.gov where for now patients will be able to buy Cellgents, that's for autoimmune conditions, at 40% off the list price. Zavzipret— you can't put a Z right in the middle between two consonants, Pfizer. Zavzipret for migraines, that's 50% off. And Eucrisa, probably for dermatitis, that's 80% off. Duave for osteoporosis, 85% off. Okay, so we'll see what kind of a role the website plays in drug purchases going forward. For now, let's hear from Evan from BMO Capital Markets on the deal and the outlook for the broader drug group. So I just want to ask you generally, before I ask you about, you know, Pfizer and the government and the latest news, I want to ask you generally about how you would have sized up the pharma group maybe a couple of weeks ago. I've been reading that it's unusually cheap. Was that your sense of the industry and what made it like that?

If so, I don't know if I'd use the word unusually because I think there's a real reason why it was cheap and definitely kind of traded down versus say the broader market. A few things driving it. First of all, you had the threat of tariffs on pharmaceutical products, which was new. Now it's been out since April. You had the threat of most favored nation drug pricing. So the idea of pegging prices in Medicaid, Medicare, or broader in the commercial space to those outside of the United States. But when you look at these companies fundamentally, investors really were not interested in buying names that had to fill these huge upcoming revenue gaps with big loss of exclusivity events. You look at Merck, for example, they have Keytruda going off patent at the end of the decade. That's going to be a $30 billion product. It's not all going to go to zero, but they have to show that they can grow through that. And that's through business development and their own internal innovation, which is really hard. You know, why would you buy Merck when you can buy NVIDIA or the AI trade and you get that hypergrowth? Whereas in pharma, it's a slog. You have macro headwinds and you have these internal kind of structural issues that make it challenging for executives.

For people who don't know what most favored nation pricing means, what is that? Where did this idea come from and why does it have a sort of momentum now? Great question.

So when you look at drug prices and their costs, typically in the United States, our costs and prices are higher than other parts of the developed and kind of, you know, rich world. There's many reasons for this. One, our system isn't controlled by a single payer, so there's not a large negotiation power We have lots and lots of insurance companies that are negotiating individual deals. The idea here is to equalize that parity and to either bring up prices outside of the United States or bring them down here, do something of the both to have other countries pay their fair share. And you know, as some folks in the government have been saying recently, not have the American taxpayer or patient be ripped off. By pharma. The complexity here though is when you say drug price, what is it? Is it the list price? Is it the net price? Is it the out-of-pocket cost? Is it the cash price? You know what we see with obesity products, and that's what makes it complicated because we have lots of prices and I think a lot of people think of what they pay at the pharmacy counter as their drug costs. And the reason why that may be so high is not because of the pharma companies, it's because of the structure we have with PBMs. So long way of saying there's a lot of issues and it's an easy way to peg one reason for it to try to solve it. But given the complexity, just forced price controls are not going to really change things materially.

So we've seen this news about a new website, TrumpRx. Yes. This is a deal with Pfizer. And, uh, tell me what you can about that. It seems to me like there's some similarity here with what's going on with the makers of the obesity drugs, right? This deal with Pfizer is if you don't have insurance, now you can get the drugs at a discount. That's kind of what Lilly and Novo do with their obesity drugs now, right? Is it similar? And how would you describe this program? Correct.

So a few things that we do know. The idea here is for a select group of drugs, including Xeljanz, which is one of their RA drugs—

rheumatoid arthritis—

for rheumatoid arthritis. It's, um, for inflammatory conditions. The idea is to offer essentially a cash pay discount to folks who don't have insurance or whose insurance doesn't cover or doesn't cover it well. What's interesting here, I don't want to get too wonky, the price that is going to be paid for in this kind of program and TrumpRx, if this website ever goes off the ground, is a price that is similarly inclusive of the rebates and discounts that PBMs enjoy. So you're kind of equalizing and removing the pharmacy benefit managers or the middlemen. We have seen this with the obesity products. It's been successful. It's not the main driver for Zepbound and Wegovy sales. It is a portion, but we've seen pretty good coverage for those products, you know, over the past year. It's getting better. So I think the question here is people will still have drug plans, right? We still have insurance. Are you kind of shortchanging yourself because you're using this? You're not getting credit towards the deductible. Affordable. Is there a way to have that applied? When we spoke to the company today, they hinted that they could be working on something with the administration in terms of that. But also it's only appropriate for certain drugs that you can really pay for kind of out of pocket. This isn't going to be used for cancer drugs that are tens of thousands of dollars a month, right? That's unaffordable without insurance for most people. It would be for things like an obesity medication, like Eliquis, which is used to, you know, thin one's blood, for example, that would be a couple of hundred dollars per month.

Got it. When you talk about the pricing difference between the US and other developed markets, the US sounds like a lucrative place for these drug companies to do business. And so I would think that this program that's going to bring down the cost for Americans of their drugs, that would be one of the things weighing on the drug company's shares. But it looks like Pfizer stock has had a pretty favorable reaction to this. What do you read into that? Is it that it isn't as bad as investors thought, or maybe it's going to work out well for Pfizer?

What do you think of this? Well, yes, you are correct in that the United States is the, you know, probably most important market for any drug manufacturer, whether they're Pfizer or Novo Nordisk. The reason why these stocks have reacted positively is because there have been significant overhangs as to what could happen. And now that we have a deal with Pfizer, the assumption is that the administration is willing to make deals with other companies. Most importantly, the 100% tariffs that President Trump had mentioned last week are off the table. So that helps investors almost breathe a sigh of relief. In terms of the nuances of the drug pricing and the actual impact, you know, the way we see it is a lot of the kind of costs with drugs, you know, that people anchor onto is that list price, which is super high. The PBMs take those rebates and discounts out. They give some back to plan sponsors, but the idea is to add more transparency and clarity. So if you're just removing those big rebates and discounts, you're potentially bringing prices more aligned with prices outside of the United States. And what you're realizing, you know, when you sell a drug is going to be the same or similar at the end of the day. So that's how we frame it. And really this is only in Medicaid. I think there had been fears that this was going to expand significantly towards Medicare. And when we spoke to Pfizer, they indicated that that's not the plan at the moment.

You are bullish on Pfizer, correct? I am. Yes. After this news too. What do you like about Pfizer?

So I like the fact that Pfizer, A, has a strong dividend that is safe. I know sometimes when you hear the CFO saying the dividend's safe, it's like the bank saying we have all the money, but I've seen time and time again that they have been really conscious of their expenses recently to preserve their free cash flows that ensure that they can continue paying their dividend. That's what's critical. I think that they have finally gotten out of their own way and shown some discipline with their, for example, the proposed acquisition of Medsara last week. It's a really good obesity play. They had some good data this week showing that their diligence process was done well. When I think about Pfizer, you know why I like the stock. I still thought it was undervalued. I still think that there's upside to even the moves now. It's because their CFO, Dave Denton, is a very good operator. He understands the complexity of the business. He understands how important it is to grow that dividend. He understands what needs to happen to maintain the free cash flows to grow the dividend while also investing in R&D and of course manufacturing to run their business.

What's your favorite stock under your coverage?

So we're really bullish on Gilead. We like Gilead because they're not an obesity play. I think it's important to have the obesity plays. We like Lilly and now Pfizer because of their for into obesity, but Gilead has a very strong HIV market and they're the one company that has done a really good job of reinventing themselves every product cycle. And they have small molecule drugs, so think pills that go off patent, go to zero, and they've maintained their HIV franchise by innovating. They have a longer-acting prevention product, they have a growing oncology business, and they have some really high science cell therapy assets to treat various types of blood cancer. They're also very disciplined, very conscious of cost and expense. And I think that sustainability that they've embedded into their business makes them an attractive investment. And they also have a strong dividend that has been growing.

Has the news of the past couple days, whatever you're feeling broadly on the group was, does this make the group a little more attractive? In other words, if there was a lot of uncertainty before around government policy, we still don't know everything that's going to happen, but does this begin to clear some of the clouds where you start to say this group looks more attractive at this price?

I would say yes, because I think the overhang of pharma really started when the Biden administration implemented the IRA with Medicare drug pricing kind of negotiation. That hasn't helped. That was, I believe, in 2022. So it's been a couple of years. Fast forward to April and Liberation Day really spooked folks. And then you had Secretary Kennedy talking about drug pricing. And now that we've gotten to this point, it's pretty clear that the Trump administration is willing and wants to make deals that benefit the American patient, are not detrimental to US pharma or biopharma. So that really allows generalist investors to come back into the space. We're not out of the woods yet. Later this month, we'll get details on, you know, negotiated drug prices from the IRA for the second round of drugs. Of course, President Trump could always change his mind. And what I also note is, you know, the fact that you had Secretary Kennedy and CEO Albert Bourla in the same room, whereas Kennedy was kind of railing on mRNA vaccines very recently, you know, suggests to me that maybe President Trump has told Kennedy to have a different view or kind of be, you know, say different things about the pharma space, but that could always switch. If the MAGA voting contingency really comes down hard and says, we're not going to support President Trump, well, I think that could change his views. But the fact is he has a deal with Pfizer. He seemed very happy about it, and Pfizer was singing his accolades. So at the end of the day, I believe that's probably what the president wants.

Got it. Most informative, and thank you for your time. Is there anything I neglected to ask you that you want to add on this subject, or you think we have it covered here.

I think we have it covered, but again, stay tuned because you never know what could happen. You know, with the government shut, the FDA is not functioning, so that can slow the approval of these drugs like Lilly's Zofran. So we got to get the government open. But I am cautiously optimistic with the news of the week.

Thank you, Evan, and thank all of you for listening. If you have a question you'd like played and answered on the podcast, you can send it in. It could be in a future episode. Just Use the voice memo app on your phone, send it to jack.how@wizard.gov. Wait, wait, that's barons.com. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. If you listen on Apple, write us a review.

See you next week.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you.

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