By Morgan Smith
Pfizer (PFE) released first quarter 2012 results on May 1, coming in slightly above analyst expectations despite decreased revenues. Analysts expected adjusted earnings of $0.56 per share and Pfizer reported adjusted earnings at $0.58 per share on reported revenues of $1.5 billion. Just a week prior, competitor Merck (MRK) posted similar earnings per share in its first quarter, at $0.56 per share, which offset any large moves in Pfizer's stock immediately following the announcement.
Strong Drug Pipeline
Pfizer has a number of diabetes treatments in Phase I and Phase II trials, most of which aim to treat Diabetes Mellitus-Type 2. Competitor Sanofi (SNY) already has a strong presence with the diabetes audience; 10% of Sanofi's total sales are dependent on Lantus, a diabetes drug that can be used for types 1 and 2. Merck is also seeing success in the diabetes drug market. Merck's Januvia franchise, which treats diabetes, contributed $1.3 billion to Merck's revenues in the first quarter alone. It is likely that Pfizer's diabetes treatments currently in development will be competing directly with Sanofi and Merck in this space, which would lessen Pfizer's potential of coming out with a true blockbuster for diabetes.
Pfizer indicated in its most recent drug pipeline that it has at least four drug formulas in Phase 1 that are targeted towards Alzheimer's disease. The number is 'at least' because for proprietary protection, Pfizer does not release the compound names or indications for all of its drugs when the drugs are in the earliest stages of research. I think that this focus on Alzheimer's disease is good for Pfizer. Pfizer is looking towards an aging population to grow its revenues, and at present there are no dedicated treatments for Alzheimer's disease. Additionally, the prevalence of the disease is increasing, and the effects are devastating. There is a strong market for any drug that can mitigate or even delay the effects of Alzheimer's disease, and if Pfizer became the first company with a drug to market for Alzheimer's disease I think the news could bring Pfizer stock to new highs.
Analysts are estimating that Pfizer's tofacitinib, now undergoing FDA review, has the potential to generate $1 billion in annual sales, which would help Pfizer recover from the patent losses on Lipitor. The strong outlook is due to tofacitinib's various potentials, which include treating rheumatoid arthritis, psoriasis, IBS, and preventing the rejection of irritable bowel syndrome. As multi-line drugs are more expensive to market, I think this will erode Pfizer's margins even if analyst calls on tofacitinib's potential revenues are correct.
Recent Drug Releases
According to Pfizer's 2011 annual report, sales of Lipitor declined by $1 billion worldwide due to generic encroachment as the drug lost its patents in the US, Canada, Spain, Brazil, and Mexico. However, the newly released Lyrica and Celebrex helped offset this number, with Lyrica posting a year over year increase in sales of $630 million, or 21%, and Celebrex posting an increase of $149 million, or 6%.
Lyrica and Celebrex may contribute heavily to Pfizer's bottom line in the coming years. Lyrica is formulated to relieve pain due to spinal cord injury or other neuropathic pain, and Celebrex is formulated to treat chronic pain. As the populace of developing nations ages, particularly the United States, there will be increased demand for pain relieving drugs with a higher threshold for addiction and greater chance for continued use. Celebrex and Lyrica fit these anticipated requirements and are being marketed heavily to the 50 years and older audience.
In its first quarter earnings report, Pfizer indicated that losses due to generics erosion were partially offset by higher revenues in China, Mexico, and Russia among other developing markets. Between the first quarter of 2011 and the first quarter of 2012, Pfizer saw operational growth of 33% in China, 21% in Mexico, and an impressive 64% in Russia. If Pfizer can maintain its growth in these markets, it will go a long way towards offsetting losses due to the current U.S. regulatory environment, discussed further below. However, it is unclear if Pfizer will be able to maintain a meaningful advantage in these countries, as competitors such as Merck are experiencing similar growth.
Pfizer indicated in its first quarter earnings report that its nutrition business, which profits primarily from the sale of baby formula and related products, is posting strong numbers and a strong performance. However, as announced last week, Pfizer is selling this business to Nestle. This will net Pfizer $11.85 billion, much of which it expects to use to repurchase stock to the benefit of shareholders. Pfizer is considering a similar deal for its Animal Health business, and plans to make a decision during the 2012 calendar year.
Pfizer is maintaining similar business divisions between emerging markets and the BRIC markets, in all cases with about 43% of revenue deriving from established products, 26% deriving from primary care, and 31% from specialty care and oncology. As much of Pfizer's new pipeline is geared towards the oncology specialty I think that this percentage will grow in the coming years, assuming that a fair number of its compounds currently in development are brought to market. Since incidences of cancer are increasing, it is possible that Pfizer could increase revenues substantially here.
Moving forward, Pfizer faces struggles in the U.S. with an active legislative environment focused squarely on the health care sector. Among other decisions that will negatively impact Pfizer's business, the Patient Protection and Affordable Care Act increases the minimum rebate on branded prescription drugs for Medicaid recipients from 15.1% to 23.1%, causes greater numbers of institutions to be eligible for outpatient drug discounts, strengthens discounts for Medicare recipients in the coverage gap, and possibly most vexing, mandates a fee payable to the US federal government calculated on Pfizer's share of branded prescription drug sales to specific government programs relative to its competitors.
All told, these costs reduced Pfizer's 2011 revenues by $896 million. Pfizer's 2011 guidance indicated it expects these costs to total $800 million in 2012, though as is clear from the complexity of legislation and the number of routes reductions can take, this may be higher or lower based on Pfizer's overall performance.
Pfizer is currently trading around $23 per share with a forward price to earnings of 9.7 and a price to book of 2.1. Merck is trading around $40 per share with a forward price to earnings of 10.6 and a price to book of 2.2. Novartis (NVS) is trading around $55 per share with similar value ratios as Pfizer, at a price to earnings of 9.7 and a price to book of 2.1. Sanofi is trading around $38 with a price to earnings of 9.4 and a reasonable price to book of 1.4. GlaxoSmithKline (GSK) is the most expensive of this competitor group, trading around $47 with a price to earnings of 13.9 and a price to book of 9.0.
Despite the buffeting it has taken over the loss of patent protection for Lipitor, Pfizer has several other strong drugs and a good pipeline to carry it through the next few years. To substantially grow its revenue and shareholder value, Pfizer should continue development on drugs for the elderly and continue to work in developing markets, as it has done. Given its strong outlook and reasonable value, I consider Pfizer a strong buy now.