Pfizer’s Earnings Hold Up On Emerging Markets Growth Despite Lipitor Patent Expiry

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Pfizer (NYSE:PFE) announced its second quarter earnings on Tuesday. While a 9% decline in revenue to $15.1 billion was in line with our expectations, a 25% jump in net income to $3.2 billion came as a surprise. Sales declined mainly on the loss of patent exclusivity of Lipitor last November. The strengthening of the U.S. dollar also dragged down international revenues. Lower R&D expense however resulted in better-than-expected margins, boosting the company’s bottom-line. Pfizer is committed to divest its non-core assets to focus on its core pharmaceutical business. It currently operates in pharmaceuticals, animal health, consumer healthcare and nutrition.

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Earnings at a Glance

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The pharmaceutical company entered 2012 without the exclusivity of manufacturing Lipitor after it lost patent for the drug in November 2011. Lipitor’s worldwide sales halved to $1.2 billion in Q2 from $2.6 billion the same period last year with the U.S. sales declining as much as 75% to merely $296 million. Further, the company’s revenues were also impacted by loss of patents on other drugs, including Geodon.

As expected, primary care drugs Celebrex and Lyrica as well as specialty care drugs Enbrel and Prevenar continued to show strong performances.  While total international sales declined due to weakness in European markets, emerging markets sales soared by 14%, excluding 6% currency impact, with China and Russia driving the growth. International sales now contribute more than 60% to the total company sales as Pfizer seems to be losing its grip on the key U.S. market.

Pfizer continued to perform well in animal and consumer healthcare businesses with 7% and 11% operational growth, respectively. It is preparing to spin off and divest its animal business while the sale of nutrition business is well on track.

The company has been aggressively cutting costs over the past few months to stay afloat on anticipated drop in sales in the future, and the results were visible in margins as well. The company recorded a significant jump in net profit even as revenues declined. We were surprised to see a cut in R&D spending by 19% as the company faces patent expiry on several drugs including Viagra, Enbrel, Detrol, among others, in 2012 and needs to find another Lipitor-like blockbuster to boost revenues.

We are in the process of updating our model and revising our $25 price estimate for Pfizer to reflect the earnings and recent developments.

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