Is There A Silver Lining For Pfizer Amid Challenging Conditions?

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As expected, Pfizer‘s (NYSE:PFE) operational growth was overshadowed by adverse currency movements in the first quarter of 2015. However, that’s transient and should not worry investors too much. It is more important to understand where the business is headed fundamentally. Pfizer’s sales have suffered in recent past due to loss of patent exclusivity of several drugs and less-than-expected success from new product launches. The situation, although remains challenging, is not so bad now. While it is too early to predict anything, we believe Pfizer’s business may be at the cusp of rebounding, assuming some of the late pipeline drugs clear the clinical and regulatory hurdles. Let’s take a look at what the recent results suggest.

Our price estimate for Pfizer stands at a little over $36, implying a premium of about 5% to the market.

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See our complete analysis for Pfizer

As expected, vaccines and oncology drugs were star performers, along with strong adoption of anti-coagulant drug Eliquis. However, Celebrex lost its patent exclusivity which meaningfully affected the results. Excluding the impact of currency movement, Pfizer’s revenues grew by 2% as the growth in the U.S. suffered due to continued impact of termination of co-promotion agreements and added drag of Celebrex losing its U.S. patent.

On the plus side, Eliquis is gaining ground in the U.S., Japan, the U.K., Spain and Germany. The drug could become a multi-billion dollar franchise for Pfizer. The Prevenar franchise is expanding as well with CDC recommending it for adults aged 65 and older. The increasing uptake in this age group and growing awareness for pneumoccocal bacterial illnesses is something to cheer about. In addition, Ibrance has been a successful launch and will strengthen Pfizer’s oncology business. In oncology, Pfizer saw another positive development when a phase 3 trial for inotuzumab showed higher complete hematologic remission rate in adults who had relapsed or refractory CD22-positive acute lymphoblastic leukemia in comparison to standard chemotherapy. We believe these results suggest that  Pfizer’s growth may have bottomed out.

Pfizer is confident about its R&D pipeline with renewed focus on growth products. Currently, the company has around 10 drugs in phase 3 trials and 12 in phase 2 (important ones). Phase 3 status is interesting as Pfizer is currently testing some biosimilars for Remicade, Rituxan/MabThera and Herceptin. All these three drugs are blockbuster biologics. While Remicade clocked $6.65 billion for Johnson & Johnson, Herceptin earned close to $6.9 billion for Roche and Rituxan/MabThera brought more than $7.54 in revenues. If biosimilars are approved worldwide, Pfizer could be looking to target a market of more than $15 billion with its phase 3 biosimilars. This assumes that biosimilars will be priced 30% below patented drugs. However, at present, only Europe has an established process to approve biosimilars, though there has just been a single approval in the U.S. As such, the timeframe for approvals is even less clear than normal.

Overall, we expect Pfizer’s pipeline drugs to bring close to $5-$6 billion over the course of next four years. However, if the company exceeds this expectation and doubles the revenue from pipeline drugs, it could add approximately 10% to its value. There are reasonable grounds to consider this as a plausible scenario. some of the factors that can fuel this outcome are:  1) the growing market for biosimilars, which could be as big as $20 billion by 2020; 2) the recent acquisition of Hospira (we have not incorporated this in our model yet but will do so once the deal closes); 3) the potential success of Xeljanz and some other phase 3 drugs including a type 2 diabetes drug and possibly a breast cancer drug (phase 3), as well.

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