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Pfizer Misses on Revs, Narrows View

Zacks Equity Research

Pfizer Inc. (PFE) posted third quarter earnings of 53 cents per share, a penny above the Zacks Consensus Estimate but 12% below the year-ago earnings. Results were hit by the loss of exclusivity of certain products and the unfavorable impact of currency fluctuation. Revenues fell 16% to $13.9 billion, well below the Zacks Consensus Estimate of $14.6 billion.

Including one-time items, third quarter earnings from continuing operations fell 10% to 43 cents.

The Quarter in Detail

While foreign exchange cut third quarter revenues by $699 million or 4%, operational factors impacted revenues negatively by $1.9 billion or 12%.

International revenues declined 14% to $8.3 billion, mainly due to the unfavorable foreign exchange impact and the loss of Lipitor exclusivity. Meanwhile, US revenues declined 18% to $5.6 billion. US revenues were hit by the loss of exclusivity of Lipitor in November 2011.

Biopharmaceutical products delivered third quarter revenues of $12.1 billion, down 18%. While the Primary Care, Specialty Care, Emerging Markets and Oncology units in the Biopharmaceutical segment recorded a decline in sales, Established Products posted an increase in sales.

The Primary Care unit recorded a 39% decline in revenues, which came in at $3.6 billion. A change in reporting for Lipitor and other genericized products affected Primary Care revenues by about $2.4 billion or 40% year-over-year. Lyrica continued to perform well with sales coming in at $1,036 million, up 8%.

Specialty Care segment sales declined 10% to $3.4 billion. The Prevenar franchise put in a disappointing performance especially in the US and developed Europe as most patients have already been vaccinated. The segment was also impacted by about $260 million or 7% due to the genericization of Xalatan in developed Europe in January 2012 and Geodon in the US in March 2012.

Meanwhile, the launch of generic versions of branded Pfizer products and the inclusion of Lipitor revenues contributed to the 7% increase in Established Products revenues, which came in at $2.4 billion.

Lipitor was hit hard by the loss of exclusivity in the US. Despite making significant efforts to reduce the impact of generic competition, Pfizer saw Lipitor sales fall 87% to $192 million in the US. Generic competition increased as multiple players like Mylan (MYL) and Dr. Reddy’s Labs (RDY) launched their generic versions of Lipitor.

The third quarter saw revenues from Emerging Markets decline 2% to $2.4 billion. The Animal Health segment also recorded a 2% decline in revenues which came in at $1 billion.

Consumer Healthcare sales increased 2% to $780 million benefiting from the Ferrosan Consumer Health and Alacer Corp. acquisitions.

Selling, informational and administrative (SI&A) expenses fell 15% to $3.7 billion during the quarter. R&D expenses fell 4% to $1.9 billion. Pfizer made a $250 million payment to AstraZeneca (AZN) to obtain the exclusive global over-the-counter rights to Nexium. Pfizer remains committed to its cost-containment efforts and should realize cost savings due to workforce reductions, actions taken with the R&D portfolio, as well as savings from a smaller physical footprint.

Outlook Narrowed

Pfizer tightened some aspects of its 2012 outlook. The company now expects earnings of $2.14 - $2.17 per share on total revenues of $58 - $59 billion. Earlier, the company was expecting earnings of $2.12 - $2.22 per share on revenues of $58 - $60 billion. Pfizer now expects SI&A spend of $16.3 to $16.8 billion (old guidance: $16.3 to $17.3 billion) and R&D spend of $7.0 to $7.25 billion (old guidance: $6.75 to $7.25 billion). The Zacks Consensus Estimate currently stands at $2.20 per share on revenues of $59.4 billion.

Pfizer also announced a new $10 billion share buyback program which will be effective following the sale of the Nutrition business to Nestlé in the next few months. The new buyback program is in addition to the existing $4.1 billion buyback program.

Neutral on Pfizer

We currently have a Neutral recommendation on Pfizer, which carries a Zacks #3 Rank (short-term Hold rating). While near-term earnings will be driven by cost cutting efforts and share repurchases, longer-term growth will depend on the success of drug development. The company’s pipeline needs to deliver given the Lipitor loss of exclusivity and the upcoming loss of exclusivity on additional products in the next few years.

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