Pfizer (PFE) reported first-quarter revenues of $15.4 billion that were down 7% when compared with $16.5 billion in the same quarter of the previous year. Net income for the quarter fell by $430 million to $1.79 billion, a decline of over 19 % on a year on year basis. However, earnings per share at $.58 per share were just ahead of the consensus estimate of $.56 per share and this is the fourth consecutive quarter in which Pfizer has beaten the consensus estimates. The company noted that the performance for the quarter was driven by the sales growth in brands such as Celebrex, Enbrel and Lyrica, key geographical regions such as China and continued efforts to expand cost savings. These have served to mitigate the negative impact of $1.3 billion of revenue losses because of drugs like Lipitor in the US going off patent.
In discussing the world's largest pharmaceutical company, we have a good opportunity to examine problems of drugs going off patent that any pharmaceutical company of any size faces. This is sometimes referred to as the "patent cliff." Expiration of the drug patents hurt the company badly because of competition from low-cost generic drug producers.
Take the example of Pfizer and Lipitor its cholesterol lowering blockbuster drug. Watson Pharmaceuticals (WPI) has released a generic version of Lipitor and other manufacturers are waiting on the sidelines. Pfizer has tried to protect the sales of its branded drug by offering discounts to companies such as mail order services (which account for 40% of sales) to reject prescriptions for generic drugs and substitute Lipitor. This can at best be a short-term strategy because it also raises political issues such as health care costs.
Pfizer's competitors are reacting in different ways to the patent cliff problem. Abbott (ABT) has recently bought a potential kidney medication for a $110 million from a privately held Danish company, Action Pharma. The drug is intended to protect patients undergoing cardiac surgery from suffering severe injuries to the kidneys as a consequence of insufficient blood circulation. Merck (MRK) has recently joined hands with Trevena in a project that is designed to increase specificity, increase efficiency and reduce side-effects.
Should these trials be successful, it would be good for both companies. Novartis (NVS) is not been very successful andy it was recently discovered that a drug cheaper than the Lucentis drug from Novartis is just as effective at combating age-related macular degeneration. The cheaper drug, Avastin, is not yet licensed but doctors are increasingly prescribing it in an effort to reduce costs for patients. Sanofi (SNY) continues to be gloomy about its business outlook for this year with the expedition and profits will continue to slide as branded drugs continue to lose ground to low-cost generics.
Pfizer has announced that it would be cutting its research and development spending by about 30% or $3 billion over the next two years. This is not as drastic as it appears because the budget will still continue to be around $7 billion. The resources that would be released could be ploughed back into share buybacks to benefit the investor. Moreover Pfizer itself has demonstrated that research and development is not the only the way to acquire blockbuster drugs and mergers and acquisitions are an equally effective route. After all, Lipitor was the result of the merger with Warner-Lambert in the year 2000 and the other big-name drug Celebrex was the result of the acquisition of Pharmaca in 2003,
Pfizer is also taking another interesting approach to solving its problems by actually shrinking in size. In addition to the cut in research and development expenditure to concentrate on more promising drugs it is also actively divesting businesses. Even though its infant nutrition business is profitable and growing at 15% a year, the business has been sold to Nestle (NSRGY.PK) for $11.8 billion. Similarly, the animal health business which saw 4% growth in revenue in the first quarter to over $1 billion may possibly for sale.
The days when one giant company could use a couple of blockbuster drugs from its own research and development to dominate the market are team almost certainly over. Pfizer has had problems with developing its pipeline drugs, and these include setbacks with torcetrapib for high cholesterol, tanezumab for pain (phase III), dalbavancin (Zeven), an antibiotic for the treatment of skin infections and inhaled insulin drug Exubera. The strategic moves that Pfizer has made to overcome its drug pipeline problem include the acquisition of Wyeth and King Pharmaceuticals and we will have to see how these play out in due course. The strategic agreement with GlaxoSmithKline (GSK) for HIV treatment should also provide long-term benefits.
In looking at Pfizer as a potential investment, I would start by pointing out that the dividend yield of around 4% is enough of a reason for many people to invest. There is also little doubt that the company can maintain the dividend for many years. The move from trying to develop wonder drugs on its own to a more pragmatic collaboration and acquisition policy improve the chances of striking it big.
The collaborations are in some of the most promising areas such as cancer treatments, and the company is well poised to use emerging markets to drive sales growth. The willingness to change its business model and the resources to throw money after promising opportunities should ensure that the company continues to be successful and profitable. It is also currently among the cheapest of the major pharma stocks and I would have no hesitation in recommending a buy. Even if you are a little hesitant in buying Pfizer, hold on to your existing stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.