Credit Update: New drugs ease Pfizer’s patent cliff, though leverage is expected to remain elevated

We initiated coverage on Pfizer's USD bonds earlier this year, based on its results for FY25 (ending 31 December 2025). Pfizer has since reported its 1Q26 and 2Q26 results, covering the six months ending 28 June 2026 (1H26). In this article, we review the group's performance, update our credit metrics on a trailing twelve-month (TTM) basis and revisit our view on the bonds.

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Idea of the Week: Pfizer– bridging the USD$17b patent cliff with oncology and operational discipline

1) A resilient top line and cash flow improved, while one-off items drove the fall in profit

Pfizer’s sales held up well in 1H26. Revenue rose 3.9% year on year (YoY) to US$29.5b (1H25: US$28.4b), with more than half of the increase from currency movements. Excluding currency effects and COVID products, whose sales fell to US$0.7b (1H25: US$1.9b), revenue grew 6%.
Profit, however, fell sharply. Pre-tax income dropped 56.8% YoY to US$2.5b (1H25: US$5.8b), mainly because Pfizer wrote down the value of two drugs by US$4.3b (see Section 2 below). Such write-downs are accounting charges, so no cash leaves the company. They more than offset a US$1.9b gain from selling Pfizer’s 11.7% stake in ViiV Healthcare, an HIV drugmaker.

We also track EBITDA (earnings before interest, tax, depreciation and amortisation), a common measure of operating earnings. Reported EBITDA fell 31.7% YoY to US$7.1b (1H25: US$10.4b), but about two-thirds of the decline came from the one-offs. Excluding them, EBITDA fell a milder 10.8% to US$9.5b (1H25: US$10.7b), as costs rose faster than sales. Cost of sales, mainly the cost of making its drugs, rose 15.3% YoY. Research and development (R&D) spending rose 13.1% as Pfizer invested in cancer and obesity drugs, and legal charges rose to US$1.0b (1H25: US$564.0m). As sales held up, we think Pfizer’s core business remains stable heading into its patent cliff (see Section 2). However, higher costs cut its EBITDA margin excluding one-offs to 32.4% of revenue (1H25: 37.7%).

For bondholders, cash flow matters more than accounting profit, as cash is what services debt. Here, 1H26 was much stronger. Operating cash flow (OCF), the cash generated by day-to-day business, nearly doubled to US$3.5b (1H25: US$1.8b). Free cash flow (FCF), the cash left after investment in factories and equipment, rose to US$2.5b (1H25: US$571.0m). Pfizer attributes part of the increase to the timing of payments and receipts, which may reverse. Even so, FCF understates Pfizer’s cash generation, as it absorbed the final instalment, of about US$2.6b, of a one-off US tax on past overseas earnings. Excluding this, FCF would have been about US$5.1b.

Looking ahead, management raised its FY26 revenue guidance to US$60.5b-62.5b (previously US$59.5b-62.5b) on its results call for the second quarter of 2026. It did so even as it cut its FY26 COVID revenue estimate to about US$4.0b. It also expanded its cost-cutting programmes, targeting about US$9.7b of net savings through 2029 (previously US$7.2b), at a further one-time cost of about US$6.0b, over half of it in cash. We expect the extra savings, which start in 2027, to cushion margins during the patent cliff and support debt servicing, although higher R&D spending will absorb part of the benefit.

2) The patent cliff has narrowed, but sales losses in 2027-2028 will keep leverage elevated

Pfizer’s main challenge is its patent cliff. When a drug’s patent expires, cheaper generic copies can enter the market, and the original drug typically loses 80-90% of its sales within a year. Several of Pfizer’s best-selling drugs lose US patent protection before 2030 (see Table 1 below).

The good news is that the cliff has narrowed. Pfizer has settled most of the patent lawsuit challenges over Vyndaqel/Vyndamax, its second-largest drug franchise (1H26 sales: US$3.4b), which treats a rare heart disease. Under the settlements, generics can launch in the US only from 1 June 2031, about 2.5 years later than management had assumed. Management therefore cut its estimate of annual revenue at risk from patent expiries by 2030 to US$14.0b-15.0b (previously US$17.0b) on the 1Q26 call. One challenger, Apotex, has not settled, and its case is ongoing.

However, 2027-2028 remains the pressure point. Ibrance (breast cancer) and Xtandi (prostate cancer) lose US patent protection in 2027, and Eliquis (a blood thinner and Pfizer’s top-selling drug) in 2028. Together, these three drugs made up 25.9% of 1H26 revenue. Their US sales also face lower prices set by the government for Medicare, which insures older Americans. We therefore expect a meaningful fall in earnings over 2027-2028, which should keep leverage in the mid-3x range.

To replace these sales, Pfizer is relying on newer drugs it has launched or acquired. These brought in US$6.3b of revenue in 1H26, with sales growing 22% YoY in 1Q26 and 18% in 2Q26, excluding currency effects. For example, sales of Padcev, a bladder cancer drug from Pfizer’s US$43.0b purchase of Seagen in 2023, rose 30.1% YoY in 1H26.

That said, not every new drug will succeed. In 1H26, Pfizer wrote down US$3.8b on a Seagen lung cancer drug that failed a final-stage trial, and US$525.0m on Oxbryta, a sickle cell drug withdrawn in 2024. These non-cash charges signal lower future earnings from acquired drugs and weaken the cancer pipeline we highlighted at initiation, although Seagen’s sales have so far beaten management’s expectations.

Encouragingly for bondholders, Pfizer has shifted from large acquisitions to smaller deals. Since buying obesity drug developer Metsera for US$8.0b in November 2025, it has agreed to pay US$650.0m upfront to partner with China’s Innovent Biologics on 12 early-stage cancer drugs. On the 2Q26 call, management put its remaining deal budget at about US$6.0b and signalled that further deals would be small add-ons. We therefore see limited risk of a large debt-funded acquisition, although milestone payments on these deals could weigh on cash flow.

Looking ahead, we think the new drugs will replace much, but not all, of the sales at risk, and only partly in time. On the 1Q26 call, management said they were on track for more than US$12.0b of sales in 2026, against US$14.0b-15.0b of annual revenue at risk. Management itself expects revenue to return to growth only from 2029. Key events to watch include a late-stage prostate cancer trial result due in 4Q26, progress on Metsera’s obesity drug, which targets first approval in 2028, and the Apotex case. Setbacks would delay the recovery after 2028 that underpins our credit view.

Table 1: Non-COVID drugs more than offset lower COVID sales, but drugs losing US patents in 2027-2028 are still a quarter of sales

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in PFE 5.300% 19May2053 Corp (USD), and the analyst who produced this report holds NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.