Pfizer (NYSE:PFE) recently announced its Q2 results, which were mostly in line with our expectations. To see our full analysis of the company’s Q2 earnings, please refer to our note Pfizer’s Earnings Hold Up On Emerging Markets Growth Despite Lipitor Patent Expiry. The company is in process of selling its nutritional business while hiving off its animal business. In the wake of earnings and recent developments, we have slightly increased our price estimate for Pfizer to $25 from $26, which is about 5% ahead of current market price. Below we discuss the major changes made to our model.
Pharmaceutical Segment
There have been several developments in the pharmaceutical segment in the last couple of months. Many of the company’s drugs including Inlyta (for additional indication) and Bosutinib (new drug) got approvals. On the other hand, the FDA delayed approvals for some of its most promising drugs including Eliquis and Tofacitinib several times while it rejected Tafamidus. Eliquis and Tofacitinib, considered as prospective blockbusters, are now expected to get the FDA approval early next year. Once approved, both of these drugs can clock peak sales of $3 billion, individually. Accordingly, we have updated our model to reflect these developments.
Further, we have slightly lowered our revenue expectations for Lipitor due to more than expected decline in revenues post patent expiry last November. The same was offset by an increase in revenue projections for many primary care drugs including Celebrex, Lyrica as well as specialty care drugs Enbrel and Prevenar due to continued strong performance. There have been several positive developments around these drugs.
Recently, the company won a patent case over the generic version of pain drug Lyrica, which has given Pfizer exclusive sales rights of its second largest selling drug until 2018. Lyrica also got approval for broader use. In addition, the WHO and CDC recommended the vaccine Prevnar 13 for adults aged over 50, which could strengthen Pfizer’s foothold in anti-infectives drug market while boosting the drug sales. The company settled lawsuits with Mylan And Impax over generic Detrol LA, delaying the generic competition until 2014.
Other Segments
While Pfizer continued to perform well in animal and consumer healthcare businesses, it is committed to divest its non-core assets to focus on its core pharmaceutical business. The company is preparing to spin off and divest its animal business while the sale of nutrition business is well on track. We have removed the nutrition sales projections after the company agreed to sell its infant nutrition business to Nestle SA for cash consideration of around $12 billion. Due to the same, revenues from Legacy, Alliances and Diversified segment will decline in 2012 while the net cash increased. Owing to significant cash flow, our price estimate has slightly increased. However, excluding the impact of the nutrition business, we still expect the company to continue to grow its revenues in Legacy, Alliances and Diversified segment.
We believe these Pfizer’s decision to focus on its core pharmaceutical business will create more value for shareholders as the cash proceed received could be used to reduce debt or fund R&D expenditure to nurture the company’s pharmaceutical pipeline to combat patent cliffs. Alternately, Pfizer could look at inorganic growth to acquire new drugs.
Gross Margins
The company has been aggressively cutting costs over the past few months to stay to prepare for the anticipated drop in sales in the future. Therefore, we have increased our margin expectations for 2012. However we still expect margins to decline to 75% by the end of forecast period.
We have also changed our model structure for the pharmaceutical segment to make revenue a direct driver for each drug as opposed to segment market share. Users can now directly modify a revenue forecast to see its impact on the company’s price estimate.
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