Pfizer Fights Patent Losses With Divestments

| About: Pfizer Inc. (PFE)

Pfizer Inc (NYSE:PFE), the world's biggest pharmaceutical company, posted an enormous increase in quarterly profits from $1.4 billion in Q4-2011 to $6.3 billion in Q4-2012 because of the $11.85 billion cash sale of its infant nutrition unit to Nestle. Pfizer completed the sale in November and booked the whole gain of $4.83 billion. The company was also able to lower its costs and expenses and as a result performed better than analysts' estimates. Excluding one-off items, Pfizer's adjusted quarterly earnings were $3.52 billion or $0.47 per share which off 6.9% year over year. The company is still recuperating from the loss of patent of some of its best drugs such as Geodon, Xalatan and, of course, Lipitor.

Overall for fiscal year 2012, analysts were expecting an 11% fall in revenues to $14.37 billion revenues dropped by just 6.6% to $15.07 billion, of which $271 million was due to foreign exchange losses. Revenues in the international market dropped by 5% to $9.3 billion due to foreign currency losses and the loss of Lipitor's exclusivity in Europe in Q2-2012. But it was in the U.S. where the drop in revenues was the most acute, declining 9% to $5.8 billion due to Lipitor's loss in Q4-2011 and Geodon in Q2-2012.

Meanwhile, Pfizer's animal health unit Zoetis (NYSE:ZTS) successfully went public in early February and since then, its stock has risen by 9.6% taking its market cap to just below $17 billion. Pfizer has been divesting away from non-core assets to focus on its prescription drugs operations which continues to report falling sales due to loss of patents. The Nestle deal and Zoetis spinoff were a part of that strategy. Zoetis raised $2.24 billion through its IPO, selling 17.2% of its shares to the public and was the biggest U.S company IPO since Facebook (NASDAQ:FB) last May. The shares were initially offered for $26 a piece on 31st January, higher than even the top end of Pfizer's own estimate of $22-$25 and began trading from 1st February. Zoetis is a rare public company, the only listed firm that focuses on animal health, particularly cattle and swine, a 'pure play' in this $22 billion niche and competes with units of Sanofi (NYSE:SNY) and Merck & Co. (NYSE:MRK).

Zoetis account for 7.3% of Pfizer's $43.9 billion in revenues booked through the first 9 months of 2012. While the animal unit's revenue rose by just 1.7%, its net profit increased by 87% to $446 million. The company operates in nearly 70 countries and books 27% of its annual revenues (2011) from the emerging markets. The future of Zoetis looks promising due to the growing need for animal medicine and the favorable demographics of most emerging markets. It expects the animal medicine market to grow at the annual rate of 5.7% over the next five years. Pfizer still holds 83% of Zoetis but is expected to sell it gradually through the end of 2014 to repurchase stock because its core business is in longer term patent trouble.

Pfizer has relatively better future prospects due to its new blood thinner drug Eliquis, for which it recently got the approval from FDA. The company developed this drug in collaboration with Bristol Myers Squibb (NYSE:BMY) and I have discussed it at length in one of my previous articles. But drugs like Lipitor do not come around that often, given the timing and the peak in anti-cholesterol dietary recommendations driving mass prescription adoption. The rise in lifestyle diseases like Type-II diabetes and other auto-immune disorders in emerging markets will drive generic sales if current medical recommendations hold serve.

Pfizer had also spent $3.4 billion in the previous quarter for stock repurchases. For 2013, Pfizer has given an earnings outlook of $1.50 to $1.65 per share coming from revenues of $56.2 billion to $58.2 billion; which is in line with analysts' estimated revenue outlook of $57.55 billion.

Pfizer's shares have risen by 13.5% in the past six months while those of its rival Merck & Co. are down by 6% in the same period. I like the move to split off the animal unit from the core company in order to improve branding possibilities and unlock value. As the world tries to cope with feeding animal protein to a growing segment of the world's population the need for care will rise. Intensive farming practices create animal health issues, there are no ways around that. Zoetis is well placed to tap into that and Pfizer was right to spin it off. But at a P/E of 22 and continued divestment of its more profitable units I'd be leery of Pfizer at these prices with the S&P 500 (NYSEARCA:SPY) approaching a long-term top and likely heavy resistance.

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.

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