Pfizer’s Emerging Markets Growth And Newer Drugs Mitigate Lipitor’s Slide

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Pfizer (NYSE:PFE) reported a 7% year-over-year (y-o-y) decline in revenues in Q4 results announced on Tuesday. The drug maker clocked $15 billion in revenues during the period as significantly lower revenue from Lipitor following the loss of patent protection was partially offset by the continued strong growth of Lyrica, Prevenar 13 and Celebrex amongst other drugs. Double-digit growth in emerging markets also stemmed the decline even as strengthening of the U.S. dollar dragged down overall revenues by 2%.  While adjusted net income declined (excluding the gain the sale of the Nutrition business), overall operating margins slightly improved following Pfizer’s cost reduction efforts. [1]

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Lipitor Weighs On Growth

Growth in the pharmaceutical division was largely hurt by the patent expiry of Lipitor, Pfizer’s once largest selling drug. While a decline in the cardiovascular drug’s sales was already on the cards, the decline intensified during Q4 and a major recall of Ranbaxy’s generic Lipitor during the period didn’t seem to limit this. The patent expiry of Lipitor in Europe during Q2 2012 also abetted the decline on a y-o-y basis as the worldwide revenues slumped 70% with the U.S. shedding more than 90% in sales.

Pharmaceutical revenues were also impacted by loss of patents on other drugs, including Geodon, a mental disorder drug and Xalatan, an eye care drug, in line with our expectations (Read Pfizer Q4 Earnings Preview: Pain From Patent Expirations To Continue).

Several Existing And New Drugs Mitigate The Pain

However, strong performance by primary care drugs for pain Celebrex and Lyrica, on the back of expanded use and entry into new markets offset the decline. Buoyant demand for Viagra, an erectile dysfunction drug, in the U.S. lent support even as its sales declined in certain other countries following loss of patent protection. In line with our expectations, a rebound in demand for specialty care drugs Enbrel, an auto-immune drug came as a relief for the drug maker as its key market Europe improved a bit and emerging markets continued to see burgeoning growth. After witnessing a decline in Q3, sales of Prevenar 13, a pneumococcal vaccine, jumped over 20% on back of approval for new age groups and timing of government purchases in emerging markets.

Launch of Inlyta and Xalkori in the U.S. and certain other developed countries added to the earnings and drove the oncology sales.

Pfizer continued to perform well in animal and consumer healthcare businesses with 8% and 17% operational growth, respectively. Consumer healthcare sales increased mainly due to the acquisitions of Ferrosan Consumer Health in December 2011 and Alacer Corporation in February 2012.

Emerging Markets Surge, But Pricing Pressure A Concern

While total international sales declined due to patent expiries and a strong U.S. dollar, the growth in emerging markets bounced back with a 20% y-o-y jump in operational sales compared with 9% in Q3. [2] China and Russia continued to be the major drivers amongst emerging countries. While volumes increased significantly, pricing pressure (2% decline) in emerging markets was a negative and needs to be carefully looked out for going forward.

The company had been aggressively cutting costs during 2012 to mitigate the impact of patent expiries, and the results were visible in a decline in marketing and administrative costs as well as R&D expenditures as % of revenues. Adjusted gross margins declined owing to significant decline in revenues from Lipitor and aforementioned pricing pressure.

Updates on Zoetis IPO

Pfizer is planning to launch and price its impending IPO of its animal unit Zoetis by the end of this week. [3] The drug maker intends to offload up to 19.8% of total outstanding equity or 86.1 million shares at an estimated price range of $22-$25 per share. [4] At the higher end of estimated price band, the deal could fetch Pfizer as much as $2.1 Billion. And, looking at the $4.3 Billion of revenues the business garnered in 2012 [1] with consistent growth rate, the IPO doesn’t look overvalued even at the higher end of estimated price band.

The cash proceeds from the IPO will help Pfizer reduce its debt and fund its buyback program. This could trigger an upside to our $27 price estimate for Pfizer, which we are in the process of updating to reflect the earnings and recent developments.

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Notes:
  1. Pfizer Reports Fourth-Quarter and Full-Year 2012 Results; Provides 2013 Financial Guidance, Pfizer, Jan 29 2013 [] []
  2. Pfizer Reports Third-Quarter 2012 Results, Pfizer, Nov 1 2012 []
  3. Pfizer’s Zoetis IPO, Tri Pointe Homes on Tap, Wall Street Journal, Jan 28 2013 []
  4. Pfizer Animal-Health Unit Seeks $2.2 Billion in IPO, Bloomberg, Jan 19 2013 []
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