Pfizer Surprises But Outlook Remains Uninspiring

| About: Pfizer Inc. (PFE)

Earlier this week Pfizer, Inc. (PFE-NYSE) reported fiscal 4Q12 results (published company information related to quarterly results are linked for you here).

Quarterly results were driven by a 29% decline in primary care performance despite a surprising 13% expansion in Lyrica sales for the period. Animal health, consumer health and established products also proved to be major catalysts for the period by expanding sales 6%, 16% and 17% respectively. Overall revenues totaled $15.B with per share earnings being reported as $0.47 (please refer to the table below);

  4Q12 4Q11 Change
Revenues $ 15.1 $ 16.1 -6.6%
Gross Margin 78.9% 77.5% 1.4%
Operating Margin 35.5% 35.8% -0.4%
EPS $ 0.47 $ 0.49 $ (0.02)
* Source: Pfizer      

Results eclipsed my previously stated forecasted estimates (link to article here) as well as consensus forecasts largely given the favorable Lyrica results coupled with strong consumer health benefit. However, continued margin pressure should be expected as the company will be challenged to continue current headcount management measures and international sales comprise a larger portion of overall sales.

Concerning the pipeline, CEO, Ian Reed continued to reference it as one of the primary going forward catalysts of the organization. Given the focus of this critical business component and the relatively large late stage compound volume it was surprising to learn that the FY13 budgeted R&D spend is forecasted to decline an additional 4-8% to $6.5-$7.0B down from $7.3B in 2012.

In the revealing Q&A phase of the call, the company provided some additional color around mounting rep demands. To this Olivier Brandicourt noted that Lipitor (a former PC product and now nested in Established Products) is being carried in the bag of the cardiovascular sales force. CFO, Frank D'Amerio also provided some additional information related to the US Eliquis launch but failed to offer any insights as to possible deviations with the co-promote agreement revenue split that Pfizer entered into with Bristol-Myers Squib (BMY-NYSE). Please adjust your BMY models accordingly.

Of additional concern is the prevalence of price reductions that Mr. D'Amelio referenced that shaved an additional 2-4% off of certain regional results. While these cuts will clearly be offset by ongoing operational cuts and the company's increasingly aggressive pricing strategy that has moved to bi-annual increases in recent years, this becomes an increasing concern as the regional share of total sales increases.

Pfizer offered a fiscal 2013 outlook that again fails to install any confidence in the overall potential of the pipeline with the company projecting revenues in the range of $56.2-$58.2B representing a continued slide of 1-5% from fiscal 2012 with EPS of $2.20-2.30 (table below).

  FY13e FY12A FY12e
Reported Revenues 56.2-58.2B 59.0 B 58.0-59.0B
Adjusted Cost of Sales as a % of Revenues 19-20% 18.6% 18.7-19.2%
Adjusted SI&A Expenses 15.6-16.6B 16.3 B 16.3-16.8B
Adjusted R&D Expenses 6.5-7.0B 7.3 B 7.0-7.25B
Adjusted Other (Income) / Deductions ~$900 M $835 M ~$900 M
Effective Tax Rate on Adjusted Income ~28.0% 29.30% ~29.0%
Reported Diluted EPS 1.50-1.65 $1.94 1.30-1.38
Adjusted Diluted EPS 2.20-2.30 $2.19 2.14-2.17
* Source: Pfizer Inc.      

One additional point of interested during the Q&A phase of the call was that the company offered limited insights into it's M&A strategy. The 'bolt on' acquisition size was further defined by referencing the King acquisition and that some multiple thereof would be in play should it align to the strategic focus of the firm. Ian Reed went further when pressed about a potential break up of the firm by suggesting that it is something that could be further evaluated as the business model evolves.

Despite the limited optimism expressed by some in the industry, the weak forecast should not be viewed as a surprise and is largely echoes the issues facing the company that I laid out in early December (link by to article here). All considered I am forecasted FY13 revenues of $55.5B with per share earnings of $2.17 on an adjusted diluted basis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.