Pfizer’s (NYSE:PFE) fourth quarter results were a reminder of the continued growth pressure that the company faces due to declining revenues from its legacy drugs. For the full year 2013, the sales decline in the U.S. and international markets was roughly the same, implying that the revenue split remained unchanged. Going forward, we believe that international markets will become more important for Pfizer as the company taps into opportunities that exist in emerging markets of China and India. At the same time, we believe that most of the revenue growth will be driven by the expected ramp-up in the company’s oncology drug sales. This will be complemented by a slight moderation in R&D (research and development) expenses, unlocking some value for shareholders.
Our price estimate for Pfizer stands at $33.51, implying a premium of about 5% to the market price.
Streamlined R&D Efforts And Focus On Oncology Will Help Create Value And Sustain The Business Growth
Pfizer’s R&D expenses (excluding Zoetis) dropped from $9.13 billion in 2010 to $6.68 billion in 2013.  As a percentage of gross profits, the figure came down from 17.21% to 15.78% during the same period as the company actively trimmed its R&D budget.  A significant portion of this R&D downsizing can be attributed to Pfizer’s withdrawal from cardiovascular drug research.
We expect further R&D cuts as Pfizer restructures its business to divert resources to certain key growth areas such as oncology (cancer treatment) and reduces spending in other therapeutic areas. The company is reorganizing its business into innovative and value segments, which would lead to better focus and efficient resource allocation. The innovative segments are likely to be allocated proportionally more of the R&D budget, and we believe that oncology (cancer treatment) comes under this category.
Oncology and immunology are going to be the key growth areas for the pharmaceutical industry. Oncology can help Pfizer command better pricing as primary care areas such as cardiovascular get flooded with generics. The company’s focus in this area is evident from the fact that 3 out of 6 drugs in its late stage program are intended for cancer treatment. These include Palbociclib for breast cancer, Inotuzumab Ozogamicin for aggressive non-hodgkin’s lymphoma and acute lymphoblastic leukemia, and Dacomitinib for non-small cell lung cancer.