Pfizer (PFE) is one of the ten largest pharmaceutical companies in the world, with a current market cap of $188 billion and $67.4B in sales in 2011. However, with the patent expiration of Lipitor in November 2011, its best-selling drug with $9.6B sales (or 14% of total sales), as well as several products that will lose exclusivity within a year, PFE will face a significant decline in revenue in 2012. The question an investor would like to know is: how much will the declining drug sales impact Pfizer's revenues and earnings going forward? Is the current stock price of $26 (as of 10/18/12) fairly valued? To answer this question, we decompose Pfizer's revenues by analyzing its existing products, patent expirations, and drug pipeline. Our goal is to provide 5-year financial projections and derive an estimated intrinsic value for PFE.Business overview
Pfizer's main business segment is pharmaceuticals, which comprise 85% of sales. Although the company also owns animal health and nutrition products ($10B, or 15% of total sales), the company intends to sell or spin off these product lines in order to focus on more profitable pharmaceutical products.
Pharmaceuticals represent PFE's most profitable segment and have produced several blockbuster drugs that benefit patients in cardiovascular, neurological, oncology, inflammation, autoimmune diseases, and infectious disease indications. However, patent expirations and loss of drug exclusivity of its blockbuster drugs, including Lipitor, will significantly reduce its revenue growth going forward.
Fortunately, PFE acquired Wyeth in 2009 for $68B (a combined cash and stock transaction), along with its profitable Prevnar vaccines and Advil. The acquisition of Wyeth contributed $18B (~27%) to its revenues in 2010 alone. Pfizer also acquire King Pharmaceutical in 2010, along with its top selling acetaminophen/hydrocodone. In addition, Pfizer has streams of new drugs in its pipeline. In 2011 and 2012 alone, PFE filed several new drug applications (NDA) with the FDA and EMA. However, while these drugs are estimated to contribute $2.2B to $5.3B revenues from 2013 to 2016, PFE's total revenue growth is expected to remain low (at a compound annual growth rate of ~3.5%) due to declining sales of Lipitor and other drugs that lose marketing exclusivity.
In the following sections, we will analyze Pfizer's existing products, patent expirations, drug pipelines, and financial projections with the goal of deriving an estimated intrinsic value for this international corporation.Section 1: Sales growth from existing products
The key drivers for Pfizer's revenues are twelve drugs that have generated billions of dollars in revenues per year, including Lipitor, Lyrica, Prevnar 13, Enbrel (with Amgen), Celebrex, and Viagra (PFE 2011 annual financial review). However, with the patent expiration of Lipitor in November 2011, its best-selling drug with $9.6B sales, as well as several products that will lose exclusivity within a year, PFE will face a significant decline in sales of existing drugs. These will be partially offset by new products approved of since 2010.
We first review existing drugs which are expected to have sharply declining sales. We then discuss recently approved drugs that will contribute to revenue growth. Furthermore, Pfizer has filed several new drug applications (NDA) that are pending approval by FDA and EMA. We will assess the probability of approval and estimate future revenue growth for these new drugs. A the end of this section, we will derive revenue projections for the next 5 years based on the sales of existing products and recently approved drugs.Drugs with declining sales
Lipitor is PFE's best-selling drug, and is among the leading drugs in the industry that lower LDL cholesterol. Lipitor alone brought in $9.6B or 14% of total revenue for Pfizer in 2011 (PFE 2011 annual financial review). However, Lipitor's patent expired in November 2011, which will have a significant negative impact on its 2012 sales - we estimate that sales will decline 75% to about $2.3B in 2012, based on reported Q1 sales of $1.4B and Q2 sales of $0.3B (PFE Q2-2012 earnings report). We estimate a slower decline of 20% in the following years, translating to a $0.14 reduction in earnings per share in 2012 compared to 2011.
Lyrica, a drug for epilepsy and diabetic peripheral neuropathy, is PFE's second best-selling drug with $3.7B in sales in 2011. Pfizer's annual report stated that generic competition may impact Lyrica's sales; on the other hand, Pfizer has filed an NDA for Lyrica in treating neuropathic pain due to spinal cord injuries. As a result, Lyrica's sales may actually be able to maintain baseline growth (e.g. 3%) going forward.
Effexor, an anti-depression drug that lost exclusivity in mid-2010, has its revenue dropping 60% to $678M in 2011. Xalatan, a drug for glaucoma and ocular hypertension that lost exclusivity in early 2011 experienced a 40% drop in sales to $1.25B in 2011. Geodon, Detrol, and Revatio, with combined revenues of $2.4B in 2011, are expected to lose exclusivity in 2012 and 2013.
Pfizer has entered into partnerships to market products developed by other pharmaceutical companies, including Enbrel, Aricept, Rebif, and Spiriva. These alliance products account for $3.6B revenues in PFE's financial statement; however, due to expiration of the partnership agreements, it is anticipated that such revenues will slowly decline over the coming years.
The patent expiration or lost exclusivity of these drugs (with combined $16.3B or 24% of total sales) will have a significant negative impact on Pfizer's revenues going forward.Drugs with increasing sales
Sales from Pfizer's new drugs approved since 2010 are expected to partially offset lost revenues from the products with declining sales. These drugs include Prevnar-13, Sutent, Eliquis, Inlyta, and Xalkori.
Prevnar 13 is a vaccine for the prevention of pneumococcal diseases, which Pfizer obtained through its acquisition of Wyeth in 2010. It was approved for infants and children in 2010 and for adults of 50 years of age and older in 2011. In 2010 and 2011, Prevnar 13 had $2.4B and $3.6B sales, respectively. As Pfizer expands Prevnar 13 to a broader population worldwide, we estimate that it will have a steady growth rate of 8% between 2012 and 2016.
Sutent is a multi-tyrosine kinase inhibitor with $1.12B sales in 2011. It was first approved in 2006 for the treatment of renal cell carcinoma and gastrointestinal stromal tumors. PFE continues to expand its usage in other cancer types, including pancreatic neuroendocrine cancer. We estimate that it will have a steady growth of 8% between 2012 and 2016.
Eliquis (apixaban) is a Factor Xa inhibitor co-developed between Pfizer and Bristol-Myers Squibb (BMS). It received FDA and EU approval for the treatment of blood clots in patients after elective hip- or knee-replacement surgery in 2011. However, its application for a second indication, reducing the risk of stroke and systemic embolisms in patients with atrial fibrillation, recently received a Complete Response (CR) letter from the FDA. The drug is a new class of anti-coagulant, similar to Xarelto developed by JNJ, which has been approved for two indications. It is therefore anticipated that Eliquis will eventually get approval for this second indication. We estimate that Eliquis will start generating revenue in 2013.
Xalkori (crizotinib) is an ALK-specific inhibitor that received FDA approval in 2011 for the treatment of ALK-positive lung cancers in the U.S. Xalkori represents Pfizer's first entry into precision medicine - it is a breakthrough in lung cancer treatment and is the first new drug approved by the FDA for lung cancer in six years. We estimate that Xalkori will experience fast growth over the next several years with initial sales of $400M in 2012 and reach blockbuster status by 2014.
Finally, Inlyta was approved in early 2012 for patients with advanced renal cell carcinoma (mRCC). While the market size for mRCC is about $2B, there are several other drugs in the market for this indication. Pfizer also tried to expand the uses of Inlyta to treatment naïve RCC patients. However, the recent data released suggest that Inlyta did not meet primary endpoint in phase 3 trial in treatment-naïve RCC patients (Inlyta phase 3 for treatment naive patients fails to meet primary endpoint). Accordingly, our projected revenues for Inlyta are moderate growth from $300M in 2012 to $700M in 2016.
The combined revenues of these drugs are $5.4B, which represents 8% of total revenues in 2011. However, compared to the drugs with declining revenues ($16.3B, 24% of total revenues), sales from these recently approved drugs will be insufficient to offset the lost revenues from Lipitor and other previously mentioned drugs. Our financial projections estimate that PFE will see a significant reduction in revenues in 2012 compared to 2011. Its 2012 revenues are estimated to be $61.3B, down from $67.4B in 2011. Its revenue growth will take until 2015 to restore to its 2011 level. Its estimated EPS in 2012 is $1.26, compared to $1.27 in 2011. The reason its 2012 earnings will not decline as much as the revenues is due to reduced expenses and restructuring cost. Please read our follow-up reports on Pfizer's drug pipeline, financial analysis, and stock valuation.