Pfizer (NYSE:PFE) is set to announce its Q3 2012 earnings on Tuesday, October 30. We believe a decline in revenues is on the cards because of patent expiration of Lipitor in November 2011 and Geodon in February 2012. Additionally, the strengthening of the U.S. dollar will drag down international revenue growth. But, strong growth in emerging markets will lend some support. 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 sectors.
Our price estimate for Pfizer stands at $26, in line with the current market price. We will update our price estimate to reflect the current developments post the earnings announcement.
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 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.
We believe primary care drugs Celebrex and Lyrica as well as specialty care drugs Enbrel and Prevenar will continue to show strong performances. In addition, we expect emerging market sales to remain buoyant before considering the currency impact, with China, Russia and India driving growth for the company. However, the weakness in the European market could drag down overall international sales.
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 declining sales in the future, and the results could be visible in margins as well.
The near-term results may be affected on account of lost sales as the looming patent expiration for Enbrel and Detrol, among others, in 2012 will hit revenues. In addition, 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.
Despite these setbacks, we believe the drug pipeline is still 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 by early next year even as the agency has raised safety concerns for the drug. Eliquis could also be approved by next year. The revenue potential of Eliquis could be in excess on $3 billion and could offset revenue loss from Lipitor within the cardiovascular category.
Also, 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. All these factors could help the company fend off patents expiry.
We, however, believe that the company’s current valuation already reflects all these factors after appreciating nearly 30% in the last year.