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Pfizer's Not Losing Its Kingpin Status

Richard Saintvilus

NEW YORK (TheStreet) -- Another quarter is in the books for drug giant Pfizer and it seems management has healed anxieties about the company's ability to innovate and return value back to shareholders following its spinoff of Zoetis earlier this year.

Although the decision to spin off Zoetis was -- in my opinion -- well thought out, the Street's concerns, which emerged amid a reduction in management's revenue forecasts, were not unfounded especially when Pfizer called for a decline in both earnings-per-share and operating income.

Although management did its best to explain the reason for the guidedown, which included contributions from Zoetis, analysts weren't satisfied. But following a better-than-expected third quarter, which beat the consensus estimate, Pfizer has also cured fears of an eroding pipeline. Investors are now debating whether they should buy into this breakout, which the stock has suddenly enjoyed, or calm their nerves for a better entry point.

First, let's realize that unlike the July quarter, during which management was criticized for "beating" earnings solely due to its cost-cutting measures, I doubt such tone is warranted this time around. Some investors still balked at the fact that revenue did decline again this quarter by 2% to $12.6 billion. Even so, we have to credit management for the strong sequential improvement from the 6% decline in the July quarter.

Not to mention, Pfizer's performance significantly outperformed the likes of GlaxoSmithKline and Merck , the latter of which recently posted 4% revenue decline. And when digging deeper into Pfizer's segmental performance, it was clear that although Pfizer has not fully remedied its near-term growth struggles, let's appreciate that management is executing on its long-term vision.

For instance, in addition to the Zoetis spinoff that was completed last quarter, management had disclosed some restructuring initiatives that were intended to deliver more value to shareholders. Among these initiatives, the company would be divided into three separate components. One of these would include what it called "value core." Meanwhile, the two other segments were going to focus on innovation within existing businesses, like consumer health, oncology and vaccines.

Truth be told, ahead of recent quarterly results, I was a bit skeptical that the proposed changes would produce the sort of results that the Street expected, especially given the 15% run-up in the stock over the past three months. The other thing was that, Abbott Labs hasn't exactly blown the doors off since its AbbVie spinoff back in January.

So with these issues in mind, my growth expectations for Pfizer were tempered, or as I prefer to say, "more realistic" than most. But not only was management able to grow profits by 3% year over year, but Pfizer managed to beat consensus earnings-per-share estimates by 2 cents, while growing EPS by 16% year over year. This is where management's "value core" decision has begun to pay dividends.

Among the strongest growing segments in the quarter was the oncology unit, which, in the July quarter, management cited as an area of focus. Not only did the unit post $407 million in revenue, but this was enough for a solid 24% year-over-year growth. Beyond the oncology unit, it wasn't all good news.

I've played down what -- I believe -- has been an overreaction to the company's pipeline situation -- expiring patents, which opens doors for rivals to produce generic alternatives at cheaper costs -- had a noticeable impact. The Primary Care division, for instance, took a 10% hit due to expiring patents of blockbuster drugs like Viagra and Lyrica. These declines join Lipitor, whose patent expired two years ago.

But the company is not taking its patent situation lightly. Management said that among its top priorities in the coming quarters is to boost Pfizer's pipeline with cancer-fighting drugs like Palbociclib, which is now in a phase-3 trial and used for patients with advanced recurrent breast cancer. Pfizer is also focused on drugs to treat (among others) type-2 diabetes and cholesterol.

These are markets that rivals like Johnson & Johnson and Merck have begun to target.

It was not a perfect quarter -- not by any stretch. But the strong sequential and year-over-year improvements should alleviate a great deal of doubt that Pfizer's growth would remain sedated. And although Pfizer's pipeline did reveal more weakness this quarter, don't be fooled into thinking that it is the only one. Both Merck and Johnson & Johnson showed similar symptoms. Even so, Pfizer's management has this business back on track. And with shares trading around $31, I'm modeling for low- to mid-single-digit revenue growth over the next several quarters and a steady climb to $40.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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