Pfizer Takes a Hit From Lipitor Loss But Outlook is Still Solid

Pfizer’s (NYSE:PFE) first earnings report after losing its exclusivity on Lipitor highlights some key concerns on what will Big Pharma do to mitigate the loses coming from the loss of patents for blockbuster drugs. Sales for Q4 2011 were $16.7 billion, a drop of 4% year over year while full year sales were practically unchanged at $67.4 billion. Net income came in at $1.4 billion for Q4 and was about half of the $2.9 billion for Q4 2010. For the full year, net income increased by 21% to eclipse the $10 billion mark. We believe despite the patent cliff, the drug pipeline remains solid and this will help offset anticipated revenue losses.

Revenue Losses Tough But Manageable

The main reason for lackluster results of 2011 was the loss of patent exclusivity on some of its biggest branded drugs. Lipitor, which went off-patent on November 30, 2011, has seen revenues slump by about $500 million in Q4 2011. We previously estimated that Lipitor’s market share within Cardiovascular drugs will fall from nearly 17% in 2010 to less than 12% in 2011.

Another source of weaker revenues is due to Xalatan, the #1 prescribed drug for reduction in ocular pressure. As the patent expired in March 2011, the drug’s revenues declined to $462 million in Q4 2011, which were $170 million lower than the previous comparable quarter. Pfizer, the biggest drug maker in the world and the bellwether of pharmaceutical stocks, reduced its 2012 guidance with revenues of $60.5-$62.5 billion from $62.2 billion-$64.7 billion. EPS (Earnings per share) are expected to range between $1.37-$1.52, down from $1.58-$1.73.

Patent losses and the increased threat from generic competition are the two biggest factors impacting future performance. Lipitor is also expected to lose market share at an accelerating pace going forward, which many call the pending patent-cliff. The looming patent expiration for Viagra, Enbrel, Detrol among others in 2012 will certain hit revenues.  Reduced revenues from Enbrel will seriously affect market share within Musculo-skeletal therpeautic class.

New Drugs Part of the Answer

However, Pfizer has a dedicated R&D pipeline to offset the loss of revenues from patent expiry. We are excited about Tofacitinib & Eliquis in particular.

Tofacitinib, a drug used to fight Rheumatoid Arthritis (RA), is Pfizer’s trump card in anti-TNF (Tumor necrosis factor) category worth nearly $12 billion. Though there have been some safety concerns of late, we believe the drug can be a major contributor going forward.

Eliquis, used for stroke prevention in atrial fibrillation, is being developed in partnership with Bristol-Myers. The revenue potential for the drug is in excess on $3 billion, and could offset revenue loss from Lipitor within the Cardiovascular category.

Finally, some real positives from the pharma behemoth. Pfizer has delivered on the profitability front with gross margins improving by nearly 150 basis points. Operating income growth exceeded expectations at 9%.

Comparing these numbers with any other drug giant, Merck (MRK), Eli Lilly (LLY) or Bristol Myers Squibb (BMY), will highlight Pfizer’s superior operational efficiency. Wyeth’s integration cost reduction target of nearly $4 billion achieved in 2011  has also resulted in impressive margins and free cash flow conversion. Non-pharmaceutical units contributed as well, with animal health growing 13%, consumer products 8%, and nutrition 22% compared to 2010.

Despite the concerns on patents, we believe the drug pipeline is promising and will help offset revenue losses as there are 17 new drugs in Phase 3 trials or awaiting regulatory approval. In addition, Pfizer’s  dividend yield of more than 4% is attractive, and we expect the stock to start its march toward its fundamental value of around $25.

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