Pfizer (PFE) is the world's largest research based pharmaceutical company by sales. In addition to its core human healthcare business, it has leading positions in animal health care and infant health, as well.
I was looking forward to its first quarter 2012 earnings as the company's top selling drug, Lipitor, lost patent protection in the fourth quarter of 2011.
Pfizer's issue with losing top selling drugs to patent expiration is hardly unique. Since late in the last decade, many top selling drugs have fallen to generic competition among all large drug makers. A curious thing is pharmaceutical patents. Copyrights for books or movies don't expire. Patents for widgets last forever. But drug companies aren't selling widgets or entertainment. They are peddling, and profiting mightily, by selling health care. Patent rights are provided for 20 years from the time the medication is first identified in the research phase. Never mind that it can take eight years or more for the FDA to approve a drug. There are mechanisms to extend the 20 years for a few more, and the industry is rife with litigation between generic makers and research drug manufacturers.
Due largely to an anticipated steep fall in Lipitor based revenues, Pfizer's revenue in the first quarter of 2012 fell 7% to $15.4 billion. GAP profits were $1.79 billion, or $0.24 per share. The year ago GAP profit was about $2.2 billion, or $0.28 per share. Excluding special items, earnings in the 2012 first quarter were $0.58, per share, or two percent above analysts expectations for the quarter. All in all, a solid performance given the conditions.
So, where does Pfizer go from here? Sales of Lipitor did not exactly evaporate. But to combat the influx of generic competition, marketing costs for the drug have risen, and prices and margins have fallen. Lipitor's sales in the quarter of $1.4 billion was about 42% off from the year ago quarter, and we can expect similar declines going forward.
The first step Pfizer is making is to downsize the company. It has made a deal with Swiss giant Nestle (NSRGY.PK). It announced in April, 2012 an $11.9 billion sale of the infant formula business. Nestle's Asian business grows dramatically through the acquisition, and Pfizer will use the cash to bolster share buybacks, or other corporate purposes. Pfizer also has plans to divest itself, probably through a stock spin off to shareholders, its large animal nutrition business. After that is accomplished, management will focus solely on the core pharmaceutical and over-the-counter medicines businesses.
With the focus and size of Pfizer narrowed significantly, we will see a high cash generating, high dividend paying, and only marginally growing business. It will have, after the Nestle deal, among the most cash of any non-bank companies in the country with about $40 billion in the bank. Pfizer has numerous products in its pipeline, highlighted by Eliquis. The FDA is not doing Pfizer any favors by delaying the approval of this new generation anti-stroke medication until summer, but signs are that this may be Pfizer's next billion dollar blockbuster.
In summary, there is no chance for revenue or profit growth for the short or even intermediate term. But long-term, Pfizer should prove a stable and viable stock candidate for income seeking investors.
Teva Pharmaceutical (TEVA) has had a tremendous ten year run, with earnings advances at an annual 28% clip. But that growth will be slowing down, no later than 2014, when its leading drug, Carpaxone loses patent protection. The Israeli company's stock, now available as ADRs, are expected to be listed directly on the NYSE this May.
In addition to its research based proprietary drugs, Teva is the world's largest supplier of generics. That business will be getting a boost this year from the above mentioned Lipitor losing protected status last year. Teva's generic version will be available later this year. The company's partnership with Procter & Gamble (PG) will give Teva customer access to billions worldwide.
So, despite growth, market share, and a tremendous growth history, I cannot endorse this stock due to its balance sheet. Its debt level is not excessive, as long term debt is just 32% of capitalization. But Teva has a negative book value. At year end 2011, its stated book value was $25.14. But its goodwill, divided by shares outstanding, was $32.40 per share. That is negative $7.26 book value per share if and when Teva is required to write down its enormous goodwill. Teva may earn up to $5 billion this year, and if they can turn around the balance sheet, I might be able to pay more attention to the company's substantial profitability.
A pharmaceutical company I like a lot is Canada's Valeant Phamaceuticals (VRX), which was formed in 2010 upon the merger of Biovail Corp and Valeant Pharmaceuticals. The resulting company has a fairly young portfolio of medicines in areas of dermatology, neurology, and branded generic medicines. None of its leading medications has imminent patent problems in the United States or elsewhere. It recently announced its intent to form a "center for excellence in dermatology" at its headquarters in Quebec.
Analysts look for roughly 15% annual profit growth from the company over the next five years. Valeant currently has a 5 year estimated PEG of 1.1, suggesting it is far from overpriced today. It has acquired numerous "niche" health care companies, particularly in Latin America, with funds from Valeant's own ample cash flow. This is a quality young company, and a good bet for an investor who is in a position to accept some risk.
