Pfizer (NYSE:PFE) announced its Q3 results on Thursday reporting a 16% decline in revenues to $14 billion, which was well below market expectations. While a decline in sales was already on the cards, mainly due to the loss of patent exclusivity for Lipitor last November, the unexpectedly weak performance by many of its key specialty drugs including Prevnar disappointed many. Subdued growth from emerging markets also abetted the disappointment as the strengthening of the U.S. dollar dragged down overall revenues by 4%. As expected, net income declined even as cost reduction efforts lent support. 
Below we take a detailed look at the factors that impacted the company’s performance during the quarter.
Earnings at a Glance
The pharmaceutical company entered 2012 without the exclusivity of manufacturing Lipitor after it lost the U.S. patent for the drug last November. Growth in the pharmaceutical division was largely hurt by the same. Lipitor’s worldwide sales more than halved to just $0.75 billion in Q3 from $2.6 billion the same period last year with the U.S. sales declining as much as 85% to merely $190 million. Patent expiry in Europe during Q2 2012 also abetted the decline.
Pfizer’s pharmaceutical revenues were also impacted by a loss of patents on other drugs, including Geodon and Xalatan. We were, however, highly disappointed with Prevnar whose sales declined even without considering the currency impact. Most eligible pediatric patients have been already vaccinated and the adult patients market is largely not open to the vaccine. In addition, Detrol sales took a slight hit after the drug lost patent in September 2012. As expected, primary care drugs Celebrex and Lyrica continued to show strong performances on expanded use.
While a decline in total international sales was already expected due to the weakness in European markets and the strong U.S. dollar, emerging markets sales remain subdued with 9% growth, excluding the 10% currency impact, with China and Russia continuing to drive growth. Emerging markets had witnessed double digit growth in the last couple of quarters. International sales, however, now contribute more than 60% to total company sales as Pfizer seems to be losing its grip on the key U.S. market.
Pfizer continued to perform well in animal and consumer healthcare businesses with 6% and 5% operational growth, respectively. It is preparing to spin off and divest its animal business while the sale of its nutrition business is well on track.
The company has been aggressively cutting costs over the past few months to stay afloat on anticipated drop in sales in the future, and the results were visible in a decline in marketing and administrative costs as well as R&D expenditures. Gross profit margins, however, declined due to a significant hit on revenues owing to Lipitor patent expiry.
The near-term results may be affected on account of lost sales with patent expiration for Enbrel and Detrol, among others, in 2012. A strong U.S. dollar also continues to pose a challenge for the company. 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 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 the end of this year or early next year even as the agency raises safety concerns for the drug. Eliquis could also be approved by next year. The revenue potential of both these drugs is in excess on $2 billion each and could offset revenue losses from near-term patents expiry.
While Prevnar sales may have declined in Q3, we still think the WHO and CDC recommendations for adults aged over 50 will boost the drug sales. 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 received approval for broader use. In addition, the company settled lawsuits with Mylan And Impax over generic Detrol LA, delaying generic competition until 2014. All these factors could lead the recovery for the company.
We are in the process of updating our model and revising our $26 price estimate for Pfizer to reflect the earnings.