Pfizer’s Q2 2015 Earnings Were A Turning Point

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Pfizer‘s (NYSE:PFE) stock saw an uptick following its Q2 2015 financial results which the company announced on July 28th. [1] What we previously expected has been borne out. We had earlier stated that the second quarter results might demonstrate the tipping point for the company’s growth. As it turns out, Pfizer’s overall revenues increased by 1% in Q2 2015, excluding the impact of currency headwinds. This has confirmed our view and, operationally, Pfizer is starting to salvage its situation and stem the losses fueled by generic competition. Going forward, we expect the company to pump up its R&D unit and continue to look at strategic acquisitions as a growth option. We won’t be surprised if the company spins off its ‘established products’ business in a year or two in order to unlock more value from growth-stage products. We are in the process of updating our price estimate for Pfizer in the light of recent earnings and will have an update ready soon.

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Vaccine Growth Led The Way

As expected, the quarterly results were driven by the continued uptake of vaccines, Eliquis and cancer drugs.

Excluding the currency impact, the vaccine division’s sales surged 52% globally, which include the revenues from acquisition of Baxter’s vaccines in Europe. But even the organic growth was impressive. Prevenar 13’s U.S. business has especially benefited from greater adoption among adults. That’s good news for Pfizer as higher adult usage will imply that future parents will include this vaccine as a part of the usual vaccination regimen for infants. Internationally, Pfizer reaped the benefits of increased shipments associated with Gavi, the Vaccine Alliance. Vaccines are becoming a major thrust for Pfizer. The company recently announced its decision to acquire two meningitis vaccines, Nimenrix and Mencevax, from GlaxoSmithKline (GSK) for $130 million. [2] Pfizer’s strong presence in pneumococcal vaccines with near monopoly in the U.S. will be complimented by its expansion in meningococcal vaccine market, which is expected to hit $3.76 billion globally by 2019.

R&D Trends Suggest Pfizer’s Confidence

Pfizer’s R&D expenditure increased in the second quarter both in absolute terms and as a percentage of revenues. The same holds true for the first six months of 2015. This suggests that despite a decline in overall revenues, which mostly resulted from adverse currency movements, Pfizer has deemed it prudent to invest in its R&D pipeline to drive future growth. This is a positive sign and suggests that the company is confident once again about its research capabilities. The oncology pipeline especially is buzzing. Pfizer took a notable step in early 2015 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. Additionally, other pipeline drugs including palbociclib and crizotinib, have shown good progressions. While palbociclib more than doubled the progression-free survival in cancer patients with HR+ HER-2 metastatic breast cancer, crizotinib has been assigned breakthrough therapy designation by the U.S. FDA.

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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 REPORTS SECOND-QUARTER 2015 RESULTS, Pfizer Press Release, Jul 28 2015 []
  2. Pfizer Enters Into Agreement To Acquire Nimenrix And Mencevax From GlaxoSmithKline, Pfizer Press Release, Jun 22 2015 []