Pfizer Q2 Earnings Preview: A Tough Quarter On Deck

Pfizer (NYSE:PFE) is set to announce its second quarter earnings for 2012 on Tuesday, July 31. The results may not be very encouraging this time as a fall in revenue and earnings is on the cards because of patent expiration of Lipitor last November and Geodon last February. Additionally, the strengthening of the U.S. dollar will drag down international revenue growth. For the quarter, we expect margins to improve slightly following the company’s cost reduction efforts. Pfizer operates in pharmaceuticals, animal health, consumer healthcare and nutrition.

Our price estimate for Pfizer stands at $25, implying a premium of 5% to the current market price. We will update our price estimate to reflect the current developments post the earnings announcement.

See Full Analysis For Pfizer

Sales to Decline, Margins Could Improve

When the patent for a drug expires, competition from cheaper generic products developed by competitors inevitably eats into these businesses. This leads to a significant drop in sales for that drug because of the entry of cheap generic versions and a drop in average selling price of the drug.

After the expiration of Lipitor patent in November 2011, the company entered 2012 without the exclusivity of manufacturing Lipitor, and we expect Pfizer to have felt the heat in the second quarter. Lipitor was a major source of revenue for Pfizer and brought in $9.6 billion in sales, nearly 14% of the total $67.4 billion sales in 2011. Further, the company’s revenues may also have been impacted by the Geodon drug that went off-patent in February 2012.

However, we believe several drugs such as Celebrex, Enbrel and Lyrica will continue to show sound growth. In addition, we expect international sales to remain buoyant before considering the currency impact, with China, Russia and Japan driving the growth for the company.

We expect Pfizer to perform well in nutrition, animal and consumer healthcare businesses even as the company is either in process or mulling to divest most of its non-core assets.

Pfizer has been aggressive in cutting costs over the past few months to stay afloat with the expectation of dropping sales in the future, and the results could be visible in margins as well.

Short Term Headwinds, Long Term Outlook Good

The looming patent expiration for Viagra, Enbrel, Detrol, among others, in 2012 will hit revenues. Further, of late, there have been some concerns about its pipeline of drugs. The FDA rejected its application for the central nervous system drug, Tafamidus. Further, another major pipeline drug Eliquis also received a setback as the FDA delayed the approval of the drug. The revenue potential of Eliquis could be in excess on $3 billion and could offset revenue loss from Lipitor within the Cardiovascular category.

While the near-term results may be affected on account of lost sales, the longer term outlook for the company is still sound, and we expect an upside to the shares if the product pipeline fetches commercially successful drugs as popular as Lipitor in the future. Despite the concerns on patents, we believe the drug pipeline is promising and will help offset revenue losses. Tofacitinib, a drug to fight Rheumatoid Arthritis (RA) and Pfizer’s trump card in autoimmune market, is expected to get the FDA approval in August even as the agency has raised safety concerns for the drug. Recently, the CDC recommended the vaccine Prevnar 13, which could strengthen Pfizer’s foothold in anti-infectives drug market while boosting the drug sales. The company’s pain drug Lyrica also got approval for broader use.

In addition, Pfizer’s  dividend yield of nearly 4% is attractive, and we expect the stock to move closer to its fundamental value of around $25.

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