Pfizer - Company Is Still Cleaning Up After Wyeth Mega-Merger

| About: Pfizer Inc. (PFE)

Shares of Pfizer (PFE) ended the week with losses of 3%. The global biopharmaceutical company postponed the release of its third quarter results to Wednesday as a result of the impact of hurricane Sandy.

Third Quarter Results

Pfizer reported third quarter revenues of $14.0 billion, down 16% on the year. A strong US dollar resulted in $699 million in lower revenues, or 4% in total. The loss of exclusivity of its key drug Liptor was the main cause behind the fall in revenues. On average, analysts expected Pfizer to report revenues of $15.5 billion.

Pfizer reported a 16% decline in adjusted income to $3.95 billion, or $0.53 per diluted share. Reported net income fell 14% to $3.21 billion, or $0.43 per diluted share. On average, analysts expected the company to report adjusted earnings of $0.52 per hare.

The company repurchased for $1.8 billion in stock during the quarter, bringing share repurchases year to date to $5.9 billion. The board of directors announced a new $10 billion share repurchase program for the coming years.

CEO and Chairman Ian Read commented on the results, "Overall, our results this quarter reflect continued product losses of exclusivity, most notably Lipitor in all major markets. Despite a challenging and dynamic environment, worldwide revenues from many of our key medicines, including Enbrel, Celebrex and Lyrica, continued to grow operationally. Additionally, we continued to perform well in emerging markets, most notably in China, given the breadth of our portfolio and focused investment."

Segmental Information

The decline in revenues was mainly attributable to a 39% decline in Primary Care revenues to $3.61 billion. The loss of exclusivity of Liptor in the US, Europe and Japan reduced revenues by approximately $2.4 billion.

Specialty care revenues fell 5% on an operational basis to $3.41 billion as a result of the decline in the Prevnar/Prevenar franchise. the Established products division saw an 11% increase in operational revenues to $2.38 billion as a result of generic product launches. Emerging markets showed 6% operational revenue growth mainly in China, Mexico and Russia.


For the full year of 2012, Pfizer guides for full year revenues of $58-$59 billion. This represents a narrowing of the earlier revenue guidance of $58-$60 billion.

Diluted earnings per share are expected to come in between $1.30-$1.38. Earlier, Pfizer guided for diluted earnings per share of $1.21-$1.36. Reported net earnings are favorably impacted by a $1.1 billion favorable settlement with the Internal Revenue Service.

The adjusted earnings per share guidance was narrowed to $2.14-$2.17 per share, which compares to a previous guidance of $2.12-$2.22 per share.


Pfizer ended its third quarter with $24.3 billion in cash, equivalents and short term investments. The company operates with $38.6 billion in short and long term debt, for a net cash position of $14.3 billion.

For the first nine months of 2012, Pfizer generated $43.9 billion in revenues. The company reported a net income of $8.25 billion, or $1.09 per diluted share on a GAAP-basis.

The market currently values Pfizer at $183 billion. Based on Pfizer's full year outlook, the firm is valued at 3.1 times annual revenues and 18-19 times annual earnings.

Currently, Pfizer pays a quarterly dividend of $0.22 per share, for an annual dividend yield of 3.6%.

Investment Thesis

Year to date, shares of Pfizer have risen some 13%. Started steadily rose from $21 in January to a peak at $26 in recent weeks. Shares fell back a little in recent weeks and are currently exchanging hands at $24.50 per share.

Over the past five years, shares are trading largely unchanged. Shares fell from $25 at the start of 2008 to lows of $12 in the beginning of 2009. From that point in time shares have doubled again. Between 2008 and 2012, Pfizer increased revenues from $48.3 billion to an estimated $58.5 billion this year. Net income rose from $8.1 billion to an estimated $10 billion in 2012.

The growth in revenues was largely driven by the $68 billion mega-acquisition of Wyeth back in 2009. The deal made Pfizer the largest drug maker in the world, and was followed by the smaller acquisition of King Pharmaceuticals in 2010 for $3.6 billion. The deal was applauded at the time for the "diversification" benefits. No individual drugs were expected to account for more than 10% of total revenues. At the time, 70% of drug sales had patent expirations of five years or less, including top selling drug Liptor which lost exclusivity last year. The deal was furthermore driven by the rationalization of research and development expenses.

The world has changed a lot in three years time. Now, the big pharma companies have shifted their strategy from diversification towards focus. Consequently, Pfizer has started to divest many of its businesses and has decided to focus on the human pharmaceutical division.

Earlier this year, Pfizer sold the baby food nutrition unit to Nestle for approximately $11.8 billion. The company also filed plans with the Securities and Exchange Commission to sell a 20% ownership stake in the animal health unit called Zoetis. The public offering of the division is expected in mid-2013. The deal could fetch in another $3.6 billion for Pfizer, based on a valuation of $15-$18 billion.

The large pharmaceutical companies and drug makers including Pfizer are no longer counting on mega-mergers to drive growth. For innovation, large pharmaceutical companies now rely on the acquisition of biotechnology companies to fill up the future drug pipeline.

Pfizer's growth strategy has been a failure. Over the past decade, shares have lost roughly a quarter of their value. Furthermore the current dividend yield of 3.6% is decent, but is still 31% less than the annual payouts of $1.28 in 2008.

While I applaud Pfizer's strategy on focus, I remain on the sideline. The valuation is not appealing enough as I see few short term triggers for capital gains. The dividend yield of 3.6% is not enough on a stand-alone basis, to make up for lack of expected capital gains. The weaker results in the "core" of the human pharmaceutical division makes me little optimistic for the near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.