Pfizer (NYSE:PFE) is set to announce its Q4 2012 earnings on Tuesday, January 29. We believe a decline in revenues is on the cards because of patent expiration of Lipitor and Geodon, amongst others. Growth in pain drug Lyrica, however, will partly offset the revenue loss due to patent expiries. Strong growth in emerging markets will also lend support. However, continued strength in U.S. dollar will drag down international revenue growth. For the quarter, we expect gross margins to slightly decline.
Our price estimate for Pfizer stands at $27, in line with the current market price. We will update our price estimate to reflect the current developments post the earnings announcement.
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Revenues, Margins To Remain Under Pressure
When a drug loses patent protection, 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. While Lipitor patent expired in Q4 2011, generics were available only for a month as against full three months in Q4 2012. And on a year-over-year basis, we expect Pfizer to have felt the full heat in the period. However, a massive recall of Ranbaxy’s generic version of Lipitor in Q4 could bring some relief on a sequential basis. 
The drug maker’s revenues may also have been impacted by the Geodon, a mental disorder drug, that went off-patent in February 2012. Xalatan, an eye care drug, will also weigh on growth as European patent expired in January 2012.
We believe strong performance by primary care drugs for pain Celebrex and Lyrica will offset some of the expected decline. Lyrica received approval for broader use during the year expending its addressable market. Celebrex is seeing a burgeoning demand in international markets like Japan while Viagra, an erectile dysfunction drug, continues to find buyers in the U.S. We also expect specialty care drugs Enbrel and Prevenar to rebound from decline in sales witnessed in Q3 and continue to grow. The conditions in Europe, Enbrel’s key market, have improved a bit.
Animal and consumer healthcare businesses could continue to see mid-single digit growth. After showing lackluster growth in Q3, we expect emerging market growth to be buoyant before considering the currency impact, with China and Russia driving growth for the drug maker.
While Pfizer’s gross margins may remain under pressure following Lipitor’s patent expiry, the drug maker 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 should be visible with a decline in marketing and administrative costs as well as R&D expenditures as % of revenues.
The company is also on track to bring impending IPO of its animal unit Zoetis as part of its strategy to focus on non-core assets and we will look for updates on the progress. We will also be closely watching for any clues on some big ticket acquisitions in 2013. Rumors have been getting louder that Pfizer is taking active interest in one of its Indian suppliers, Stride Acrolab’s specialty injectables unit Agila (Read Pfizer To Acquire An Injectables Unit In India?).Notes: