Pfizer Earnings Preview: Oncology Growth Will Be In Focus

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Pfizer (NYSE:PFE) may continue to exhibit revenue decline when it releases its Q3 2014 earnings on October 28th. This will result from the continued decline in sales from drugs that have lost their patent exclusivity as well as the termination of certain co-promotion agreements. It appears that at least in the near term, growth will be difficult for the company. Pfizer’s recently failed bid to acquire AstraZeneca is another example of challenges that it faces in order to revive growth. For now, there are some drugs that are helping it offset the negative impact aforementioned factors. These include Pfizer’s blockbuster vaccine franchise Prevnar and anticonvulsant drug Lyrica, which saw strong growth in the second quarter. Besides the sustained growth in vaccine franchise, the company is benefiting as well from a substantial increase in sales of oncology drugs. This should be reflected in the quarterly report as well.  We have written before about how oncology represents one of the key growth areas for the pharmaceutical industry. In particular, immuno-oncology is where the companies are channeling their research dollars.

Our price estimate for Pfizer stands at $34, implying a premium of about 15% to the market price.

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Oncology Drug Sales Will Be In Focus

According to some estimates, the immuno-oncology market could be as big as $35 billion. There is a huge opportunity to profit from successful drugs given that small-molecule R&D productivity has declined during the last decade. Given their focus on biologics and relatively strong immuno-oncology pipelines, Merck (NYSE:MRK), Britol-Myers Squibb (NYSE:BMY) and Roche Diagnostics stand to gain. We expect a strong focus from each of these companies on both in-house research and development, as well as co-licensing  partnerships, to allow each to stay ahead of the curve and try to tap the market as early as possible. This is where Pfizer has to make its mark and its attempt to acquire AstraZeneca was a step in this direction.

Pfizer’s revenues related to oncology drugs jumped 16% globally in Q2 2014, representing an acceleration in growth compared to the first quarter. [1] For the first six months, the segment’s revenue growth stood at roughly 11%. The figure is the highest among the company’s primary business segments. This is a silver lining for Pfizer as the company has seen its revenues decline from $67.8 billion in 2010 to $51.6 billion in 2013 due to the loss of patent exclusivity of some major drugs including Lipitor. The continued impact of generic competition as well as the expiration of certain co-promotion agreements for drugs such as Enbrel are key challenges that it faces.

Pfizer had pinned its hopes on some recent drug launches, but the market adoption has been rather slow. In such a situation, the performance of oncology drugs comes as a respite. We believe that Pfizer should focus on acquiring small companies rich in oncology drug pipelines or enter research and marketing collaboration.

Eliquis’ Approval For Expanded Usage Will Help

Eliquis will help Pfizer grow its cardiovascular segment sales due to the drug’s continued adoption among healthcare specialists and the approval for conditions beyond atrial fibrillation. In late July, the European Commission approved the drug for the treatment of Deep Vein Thrombosis (DVT) and Pulmonary Embolism (PE), as well as for the prevention of recurrence of these conditions. Eliquis is essentially a blood thinner and considering the decline in Lipitor’s sales, becomes a critical product for Pfizer as far as revival of cardiovascular drug business is concerned. We estimate that this segment constitutes roughly 10%-15% to Pfizer’s value.

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Pfizer Gets Drug Approval For Hot Flashes, Targets 33 Million Women In The U.S.

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The FDA recently granted approval for Pfizer’s (NYSE:PFE) Duavee, which has been developed by its wholly-owned subsidiary Wyeth in collaboration with Ligand Pharmaceuticals Inc. [1] The drug introduces a novel approach to treating hot flashes in menopausal women, and is also approved for the treatment of postmenopausal osteoporosis (common bone disease due to low estrogen levels). Unlike other drugs in the market, Duavee pairs conjugated estrogen (CE) with an estrogen agonist/antagonist (also known as a selective estrogen receptor modulator). The drug has the advantage of protecting uterus lining against hyperplasia, which increases risk of cancer of uterine lining and can happen with estrogen-only treatments. [1]

Given the reduction in cancer risk, we expect the drug to gain traction. There are approximately 33 million women in the U.S. between the ages of 45-59 (menopausal), and most of them experience hot flashes. [1] The quality of life can get significantly affected if this common condition is left untreated. Pfizer’s existing drug Premarin, which primarily consists of conjugated estrogen, earned over $1 billion in revenues in 2012. We expect Duavee to cannibalize some of Premarin’s sales starting from the first quarter of 2014. Furthermore, given that Pfizer is a well diversified company with several other major drugs, Duavee’s success will lead to only a small incremental value add.

Notes:
  1. Pfizer’s SEC Filings []