Pfizer: Overvalued At Current Price Levels
November 12, 2012 | about: PFE
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Most major pharmaceutical companies are faced with a patent cliff problem as exclusivity on blockbuster drugs expires and they are faced with competition from cheaper generics. Different companies have had varying degrees of success as they attempt to replace lost revenue. Strategies have ranged from acquisitions to spinning off unrelated businesses.
Pfizer (PFE) is the largest pharmaceutical company in the world by revenues and it is interesting to see how it has been affected and, what, if anything, it has done about it. The latest results show the impact of the loss of exclusivity on Lipitor, which accounts for about 14% of total revenues.
Pfizer has reported financial results for the third quarter of 2012. Third quarter 2012 revenue was $14 billion, representing a decrease of 16%. This is compared to revenue of $16.6 billion in the same quarter of 2011, made up of an operational decline of $1.9 billion, or 12%, and the unfavorable impact of adverse foreign exchange rates of $699 million, or 4%. For the quarter, U.S. revenues were $5.6 billion, a decrease of 18% compared with the same quarter in the previous year.
This decrease was largely the result of the loss of exclusivity of Lipitor on November 30, 2011. International revenues were $8.3 billion which was a decrease of 14% year on year largely due to the losses of exclusivity of Lipitor in developed Europe during second-quarter 2012 and the unfavorable impact of adverse foreign exchange rates. U.S. revenues comprised 40% of total revenues in this quarter compared with 41% in the year-ago quarter, while international revenues comprised 60% of total revenues in third-quarter 2012 compared with 59% in the year-ago quarter.
Primary Care unit revenues decreased 37% operationally year-on-year, primarily because of the loss of exclusivity of Lipitor in the U.S. in November 2011, Europe during the second quarter of 2012, and Japan in June 2011. Revenues were also affected by the shift in the reporting of U.S. and Japan Lipitor revenues to the Established Products unit from January 1st, 2012. The cumulative negative impact on Primary Care unit revenues was approximately $2 billion, or 34%, operationally.
Specialty Care unit revenues fell by 5% operationally year on year. Revenues were positively affected by the operational growth of Enbrel, Rebif and Benefix, and negatively affected by the decline in the Prevnar/Prevenar franchise, primarily in the U.S. and developed Europe. Additionally, utilization of Prevnar/Prevenar in adults remains minimal at this time. Specialty Care unit revenues were also negatively impacted by approximately $260 million, or 7%, year on year by the loss of exclusivity of Xalatan in developed Europe in January 2012 and Geodon in the U.S. in March 2012.
Established Products unit revenues grew by 11% operationally in comparison to the same quarter of the previous year because of the inclusion of $320 million of U.S. and Japan branded Lipitor revenues, as well as launches of generic versions of other Pfizer branded primary care and specialty care products. Total revenues from both the Established Products and Emerging Markets units were $3.4 billion, with $1.0 billion coming from emerging markets. Emerging Markets revenues grew 6% operationally year on year mainly because of volume growth in China, Mexico and Russia as a result of more targeted promotional efforts.
Adjusted income for the quarter was $3.9 billion, a decrease of 16% compared to $4.7 billion in the same quarter of the previous year and adjusted diluted EPS was $0.53, a decrease of 12% compared with $0.60 in the same quarter of the previous year. Third-quarter reported earnings were adversely impacted by a $491 million charge resulting from an agreement-in-principle with the U.S. Department of Justice to resolve an investigation into Wyeth's historical promotional practices in connection with Rapamune, a $450 million settlement of a lawsuit by Brigham Young University related to Celebrex, and charges for hormone-replacement therapy litigation. As a result of many of these factors, third-quarter reported net income was $3.2 billion, a decrease of 14% compared with $3.7 billion in the corresponding 2011 quarter, and reported diluted EPS was $0.43, a decrease of 10% compared with $0.48 in third-quarter 2011. The adjusted guidance for 2012 is now reported revenues of $58.0 to $59.0 billion, reported diluted EPS of $1.30 to $1.38 and adjusted diluted EPS of $2.14 to $2.17. Cash flow generated from operations is expected to be in the region of $18.5 billion.
The results clearly demonstrate the devastating effect that the loss of exclusivity for Lipitor has had on the top line and the bottom line. The company has seen revenues from Lipitor of well over $100 billion in the last 10 years and the loss of revenues for the first nine months of 2012 was in the region of $5.5 billion. In the US, authorized generics from Watson Pharmaceuticals (WPI) and Ranbaxy (RBXZF.PK) entered the market in December 2011 and multi-source generic competition began in May 2012. In May 2012, Novartis (NVS) launched a generic version in almost all the countries in Europe. At the end of 2011, Lipitor accounted for more than 14% of Pfizer's global revenue and there do not appear to be any drugs in the pipeline capable of compensating for the loss of revenues.
Over the past few years, growth has largely being driven by the $68 billion acquisition of Wyeth which made Pfizer the largest pharmaceutical company in the world by revenues and was followed by the acquisition of King Pharmaceuticals for $3.6 billion. At that time, 70% of drug sales had patent expirations of five years or less, including Lipitor and the diversification achieved by the acquisitions was supposed to ensure that no more than 10% of revenues were generated by any single product. Now the scenario has changed and Pfizer is planning to focus on human pharmaceuticals and divest its unrelated businesses. Frankly, I believe that it has handled its patent cliff problems very badly and really hasn't done enough despite having years on its hands to replace Lipitor revenues.
The company is financially strong and ended its third quarter with $24.3 billion in cash, equivalents and short term investments. The company has $38.6 billion in short and long term debt making for a net cash position of $14.3 billion. The current price/earnings ratio at Pfizer stands at around 19, which is higher than its peers like GlaxoSmithKline (GSK), which trades at 13.5, and Eli Lilly (LLY) at 13.2.
I think that for a company with shrinking revenues and no immediate growth prospects, Pfizer is overvalued, and the dividend yield of around 3.6% will not compensate for the poor prospects for capital appreciation because of the lack of growth potential. I believe investors should avoid buying Pfizer at this point in time.