Pfizer Beats Expectations but Reaction Is Muted
- By Stepan Lavrouk
Shares of pharmaceutical giant Pfizer (PFE) showed volatility during premarket and early open market trading yesterday as investors struggled to digest the latest earnings report. The company posted decent results for the fourth quarter of 2018, along with a muted forecast for 2019 and a relatively upbeat long-term outlook going forward. There is clearly a lot to unpack here, so let's start with the numbers.
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The intrinsic value of PFE
A good fourth quarter
Revenue for the fourth quarter of 2018 came in at $13.98 billion, inching out analyst expectations by $60 million and representing a 2% increase year-on-year. Earnings per share came to 64 cents, also just beating expectations by 1 cent and representing a year-on-year increase of 3.2%. Notably, currency fluctuations proved to be a problem for Pfizer -- revenue would have increased 5% year-on-year were it not for foreign exchange costs that ate up 3% of that 5%. Of course, costs are costs, no matter where they come from, but this particular charge speaks more to market-wide issues, rather than a systemic problem at the company.
Prepare for a challenging 2019
The real problem for Pfizer concerns the year ahead. This was articulated by CFO Frank D'Amelio:
"Our revenue guidance of $52 billion to $54 billion reflects an anticipated $2.6 billion headwind from products that have recently lost or are expected to lose marketing exclusivity shortly, including LOE for Lyrica in the U.S. in June 2019, as well as an anticipated $900 million negative impact from unfavorable changes in foreign exchange rates relative to the U.S. dollar compared to actual FX rates from 2018, partially offset by continued strong growth expected from key product franchises including Ibrance, Eliquis, Xeljanz and Xtandi as well as contributions from newly launched products and indications."
There are a few important points here, which were what the market reacted to negatively on Tuesday morning. First, the full-year revenue guidance of $52 billion to $54 billion is lower than forecast by analysts, who were expecting a midpoint of $53.78 billion. Similarly, management's estimated full-year earnings per share range was $2.82 to $2.92, which significantly undershot expectations of $2.99.
Second, currency fluctuations are clearly going to continue to be a drag on performance. Third, note the concern over headwinds related to patent loss. Pfizer recently lost patent protection for Viagra, and is set to lose protection for Lyrica, the company's blockbuster pain medication that brought in $1.32 billion in sales last quarter. These patent problems are the biggest challenge facing Pfizer right now, and are the main reason revenue has been forecast as essentially flat for the coming year.
No patent cliff till the mid-2020s
However, the long-term outlook seems brighter. After the company weathers the loss of Viagra and Lyrica, there are no significant patent loss dates on the horizon until 2025. CEO Albert Boula was notably upbeat on the earnings call, stating:
"Our strategy is to reach top-line growth through the introduction of breakthrough medicines, and we sounded, as I said in my comments, into innovating for growth. And we believe that right now we are very well positioned to achieve this strategy, because of the combination of, one, virtually LOE-free period after the Lyrica LOE until 2025, the mid of the decade, and also, the introduction of a great pipeline, what we think is the greatest pipeline ever."
This is a pipeline that includes not just new drugs, but old compounds that have been approved for new indications. Prostate cancer drug Xtandi was approved by the FDA for the treatment of men with castration-resistant non-metastatic prostate cancer, which represents a patient base of around 30,000 people a year. This helped sales grow by 18% in 2018, for a total of over $1 billion. Similarly, rheumatoid arthritis drug Xeljanz saw revenues jump 33% for the year, with total revenues coming in at $1.8 billion.
Summary
Pfizer has much to be excited about in the long term. Obviously, it is not going to be easy to get over the loss of flagship products like Lyrica and Viagra, and investor sentiment reflects this. But in the grander scale of things, Pfizer has a much clearer path ahead of it than some of its competitors. It has drugs that are ready to take up the slack and have already received approval for multiple indications. Keep this stock on your radar as we move through 2019.
Disclosure: The author owns no stocks mentioned.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with PFE. Click here to check it out.
The intrinsic value of PFE
