Pfizer's Earnings Boosted by Wyeth Acquisition

| About: Pfizer Inc. (PFE)

Pfizer Inc. (NYSE:PFE) reported first quarter adjusted earnings of 60 cents per share, above the Zacks Consensus Estimate of 53 cents and 11% above the year-ago earnings of 54 cents.

Performance was boosted by the Wyeth acquisition. This was partially offset by increased expenses, primarily due to the addition of the legacy Wyeth operations, and higher net interest expense.

Revenues were up 54%, mainly due to the favorable impact of the Wyeth acquisition ($5.3 billion). Foreign exchange boosted revenues by $733 million, or 7%. This was partially offset by $137 million, or 1%, due to legacy Pfizer products. The US healthcare reform also affected revenues by $56 million. First quarter revenues came in at $16.8 billion.

International revenues increased 60% to $9.4 billion, reflecting 48% operational growth and a 12% favorable foreign exchange impact. Meanwhile, US revenues increased 47% to $7.3 billion.

Following the Wyeth acquisition, Pfizer operates through two segments: Biopharmaceutical and Diversified. The Biopharmaceutical segment posted first quarter revenues of $14.5 billion, up 44%. Wyeth products contributed 38% ($3.8 billion) to growth thanks to strong performances by drugs like Premarin, Enbrel, Prevnar, Zosyn/Tazocin and Effexor. Foreign exchange boosted Biopharmaceutical segment revenues by 6% ($617 million).

The Diversified segment posted first-quarter revenues of $2.1 billion, up 210%. About $1.3 billion was attributable to the Wyeth acquisition. Products like Centrum, Advil and Caltrate and Nutrition products helped boost revenues. Foreign exchange impacted Diversified revenues favorably by $111 million (16%).

Meanwhile, Pfizer legacy products (down 3%) continued to struggle during the quarter, mainly due to the presence of generic competition. The loss of exclusivity on products like Camptosar (in Europe) and Norvasc hampered performance.

Revenue by Major Products

Lyrica, which grew 6% to $723 million, has experienced a very strong ramp since its introduction, and we expect the strong growth to continue with recent label expansions including for the treatment of fibromyalgia. The anti-epileptic market, as well as the market for the treatment of pain associated with diabetes and shingles, have recently become big growth areas for the drug.

Oncology product Sutent continues to witness strong uptake with sales coming in at $259 million (up 28%).

Meanwhile, sales of Pfizer’s mega-blockbuster anti-cholesterol medicine Lipitor grew just 1% globally to $2.8 billion in the first quarter. US sales of the drug fell 10%. The product, which is facing increased competition from cheaper generic rivals, is slated to lose exclusivity in 2011.

Sales of Chantix, an oral nicotinic partial agonist for smoking cessation, increased 7% to $189 million, mainly due to a strong performance in international markets. However, US sales were down 5%.

Chantix has been under pressure over the past few quarters primarily because of safety concerns surrounding it. On July 1, 2009, Pfizer announced that the US Food and Drug Administration (FDA) required it to add a black-box warning to the Chantix label. This is the most severe warning the FDA issues and is expected to further impact US sales of the drug.

Generic competition continued to eat into sales of products like Norvasc ($368 million, down 23%). Wyeth legacy products Effexor, Prevnar and Enbrel posted sales of $716 million, $520 million, and $802 million, respectively.


Selling, informational and administrative (SI&A) expenses increased 54% to $4.4 billion during the quarter, mainly due to the Wyeth acquisition and the impact of foreign exchange.

R&D expenses also increased during the quarter to $2.2 billion (up 32%) primarily due to the addition of the legacy Wyeth operations, continued investment in the late-stage development portfolio and the impact of foreign exchange.

2010 Guidance Maintained Despite Healthcare Reform

Despite the impact of US healthcare reform, Pfizer maintained its guidance for 2010. The company expects earnings in the range of $2.10 - $2.20 on revenues of $67 - $69 billion.

However, the company reduced its long-term revenue guidance for 2012 by $800 million. Although Pfizer now expects 2012 revenues in the range of $65.2 - $67.7 billion, earnings guidance remains unchanged at $2.25 - $2.35 per share as Pfizer expects the impact of healthcare reform to be offset by a reduction in spending. However, we note that 2012 revenues will decline significantly, mainly due to the genericization of Lipitor.

Pfizer reiterated its goal of realizing synergies of about $4 - $5 billion from the Wyeth acquisition by the end of 2012.

Our Take

We currently have a Neutral recommendation on Pfizer. Near-term earnings growth will come in the form of cost-cutting and share repurchases.

While Wyeth brings with it an attractive biologics platform and some complementary products and businesses, we do not believe they are enough to sustain long-term top-line growth. We see the merger as mostly an opportunity for Pfizer to cut additional costs. Longer-term growth will be dependent on the success of drug development. The Lipitor patent expiration in 2011 remains a big concern.