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Big Pharma companies rarely move their stock in a significant positive direction with earnings, so a quite quarter at Pfizer (NYSE:PFE) is perfectly fine. It's worth noting, though, that brutal cost-cutting measures are paying off in terms of excellent operating margins. If Pfizer can wring success out of its maturing late-stage pipeline, this could once again be a full-fledged blue-chip stock.

An Uneventful Quarter In The Core

In Pfizer's core ongoing business, there wasn't much that stood out about the first quarter. Revenue fell 7% on an 8% decline in drug sales, while a small gain (+4%) in animal health and a small decline (-1%) in consumer health don't amount to much. Of note, while Lipitor sales dropped 42% on the patent expiry, it's still the largest single contributor to revenue, though Lyrica (+16%) is close to becoming a $1 billion/quarter drug and Enbrel is still showing some growth as well.

Pfizer continues to wring costs out of its system. Gross margin was flat this quarter, but operating income declined just 4%, pushing operating margin over a point higher relative to last year.

What About The Nestle Money?

Pfizer got a very good deal for its nutrition business, as Nestle (OTCPK:NSRGY) ponied up nearly $12 billion to not only leverage its large nutrition business further, but to enhance its relatively weak position in China and keep rivals like Mead Johnson (NYSE:MJN) from getting their hands on it.

Now the question is what management will do with the money. Management announced a sizable share buyback program back in January, and at least some of that had to be predicated on the expected proceeds of the nutrition sale. Still, I expect a fair bit of pressure on management to be more active with sharebuybacks.

I think Pfizer management may have something bigger in mind. It would not surprise me if management would consider taking a run at another large pharmaceutical company like Bristol-Myers (NYSE:BMY) or Lilly (NYSE:LLY), particularly if the latter reports negative data from its pivotal study in Alzheimers.

Lilly does not have a great pipeline, but the stability of its diabetes franchise is worth a lot. Moreover, pipeline isn't necessarily a driving factor in these kinds of mergers - the cost-cutting potential alone could make the deal worthwhile, with pipeline developments (especially Bristol's Hep-C portfolio) just being the cherry on top.

Multiple High-Potential Drugs Could Lead To Outperformance

Pharmaceutical pipelines always have to be taken with a grain of salt, as not only might the drugs never make it to market, but competitive drugs or generics may well drive sales below expectation. Nevertheless, Pfizer has some drugs worth watching.

Phase 3 data will be coming around mid-year on bapineuzumab - the Alzheimer's drug shared by Pfizer & Johnson & Johnson (NYSE:JNJ). This is a high-risk/high-reward drug, but the potential for Prevnar and Xalkori look a little more sure. Pfizer also could reap billions from its partnership with Bristol-Myers on Eliquis, as many docs seem to look to these drugs as better stroke-prevention options than direct intervention in cases of a-fib.

There's two other drugs also worth watching. Tofacitinib, Pfizer's oral rheumatoid arthritis drug, is probably going to go through the wringer at its upcoming panel meeting, but even with risks of infection and elevated blood pressure, I think it still has blockbuster potential. Then there's Vyndaquel - Pfizer isn't normally talked about in discussions of high-price orphan drugs (that's more the realm of Sanofi's (NYSE:SNY) Genzyme, Biomarin (NASDAQ:BMRN), and Alexion (NASDAQ:ALXN), but this drug could be the start of a change in that perception.

The Bottom Line

A lot of what I love about Pfizer is how low the expectations are and how just a slight bit of outperformance can drive a much higher fair value. In fact, if Pfizer can show just 1% compound annual growth over the next decade, the shares are meaningfully (25%-plus) undervalued today. Granted, 1% may still be demanding for a supertanker-sized company like Pfizer, but the potential of pipeline upside and accretive cost-driven deals has Pfizer near the top of my list of Big Pharma stocks today.

Source: Nothing Wrong With A Quiet Quarter At Pfizer