PFE Tops Est; 2011 View Disappoints - Analyst Blog

Pfizer Inc. (PFE) reported fourth quarter earnings of 47 cents per share, a penny above the Zacks Consensus Estimate, and 4% below the year-ago earnings of 49 cents. Full year earnings came in at $2.23 per share, a couple of cents above the Zacks Consensus Estimate and 10% above the year-ago earnings. Performance was boosted by higher revenues.

Fourth quarter revenues increased 6% to $17.6 billion, exceeding the Zacks Consensus Estimate of $16.9 billion. Meanwhile, full year revenues increased 36% to $67.8 billion, above the Zacks Consensus Estimate of $67.2 billion.

The Quarter in Detail

Fourth quarter revenue growth included the impact of the Wyeth acquisition, which added $2.3 billion or 14% to the total. While foreign exchange negatively impacted revenues by $70 million or 1%, legacy Pfizer products negatively impacted revenues by $1.2 billion or 7%. Revenues were also affected by the US health care reform and EU pricing austerity.

International revenues increased 13% to $10.3 billion, reflecting 14% operational growth and a 1% unfavorable foreign exchange impact. Meanwhile, US revenues declined 3% to $7.2 billion.

Following the Wyeth acquisition, Pfizer operates through two segments: Biopharmaceutical and Diversified. The Biopharmaceutical segment posted fourth quarter revenues of $15.1 billion, up 3%. Wyeth products contributed $1.6 billion to segment revenues with performance being boosted by drugs like Premarin, Pristiq, and Enbrel among others.

Pfizer legacy products like Norvasc continued to struggle during the quarter, mainly due to the presence of generic competition. Moreover, the loss of exclusivity on Lipitor in certain territories and Aricept in the US in 2010 impacted legacy Pfizer's performance by 8% or $500 million.

Sales of oncology product Sutent increased 1% to $295 million. Meanwhile, sales of Pfizer's mega-blockbuster anti-cholesterol medicine Lipitor declined 17% globally to $2.6 billion in the fourth quarter. While US sales of the drug declined 7% to $1.4 billion, international sales fell 25% to $1.2 billion. The product, which is facing increased competition from cheaper generic rivals, is slated to lose exclusivity in the US in 2011.

Sales of Chantix, an oral nicotinic partial agonist for smoking cessation, increased 32% to $233 million mainly due to strong performance in international markets. US sales, however, declined 6% to $78 million. Chantix has been under pressure over the past few quarters primarily because of safety concerns surrounding it. On July 1, 2009 Pfizer announced that the US Food and Drug Administration (FDA) required it to add a black-box warning to the Chantix label. This is the most severe warning the FDA issues and is expected to further impact US sales of the drug.

Generic competition continued to eat into sales of products like Norvasc ($386 million, down 21%) and Effexor ($206 million, down 60%). Wyeth legacy products like the Premarin family and Enbrel posted sales of $261 million and $865 million, respectively.

The Diversified segment posted fourth quarter revenues of $2.4 billion, up 34%. Products like Centrum, Advil, and Caltrate and other Nutrition products helped boost revenues. Foreign exchange fluctuations did not have a material impact on Diversified revenues.

Selling, informational and administrative (SI&A) expenses increased 7% to $5.7 billion during the quarter, mainly due to the Wyeth acquisition. R&D expenses remained flat at $2.8 billion primarily due to cost reductions that were offset by the addition of the legacy Wyeth operations and continued investment in the late-stage development portfolio.

In addition to reporting fourth quarter and full year results, the company announced an additional share repurchase program for up to $5 billion. This brings the company's total current authorization for share buybacks to $9 billion. While shares worth about $5 billion are expected to be repurchased in 2011, the balance amount will be used for share buybacks in 2012 and beyond.

2011 Earnings Guidance Disappoints

Pfizer expects 2011 earnings in the range of $2.16 - $2.26 per share on revenues of $66 - $68 billion. The Zacks Consensus Estimate currently stands at $2.30 per share, well above the higher end of the company's guidance.

While SI&A expenses are expected in the range of $19.2 - $20.2 billion, R&D expenses are expected in the range of $8.0- $8.5 billion.

Pfizer said that it remains on track to achieve its goal of realizing synergies of about $4 - $5 billion from the Wyeth acquisition by the end of 2012. The company achieved cost savings of more than $2 billion in 2010.

While Pfizer maintained its 2012 earnings guidance, the company tweaked other aspects of its guidance. The company cut its revenue guidance to $63.0 - $65.5 billion (old guidance: $65.2 - $67.7 billion) in order to reflect the elimination of revenue contributions from future business deals as well as certain changes in market conditions.

The company said it now expects to reduce its 2012 R&D spend to $6.5 - $7.0 billion compared to its earlier guidance of $8.0 - $8.5 billion. The company intends to focus on those disease areas which represent higher potential.

Pfizer maintained its EPS guidance of $2.25 - $2.35 per share. With the company cutting its revenue outlook, lower R&D spend and share buybacks are expected to drive 2012 earnings.

Neutral on Pfizer

We currently have a Neutral recommendation on Pfizer, which is supported by a Zacks #3 Rank (short-term “Hold” rating). Our Neutral recommendation is based on our reservations that Wyeth will provide the opportunity to grow revenue for the long-term and the substantially lower revenue growth due to key product patent expiration from 2011 onwards. Meanwhile, Pfizer remains on track to complete the acquisition of specialty pharma company, King Pharmaceuticals (KG).

 
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