A Good Valuation Story if New Developments Bring Positive Results
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Recent results at Pfizer Inc. (NYSE:PFE) indicate that the company is performing fairly well considering the loss of US patent exclusivity for Lipitor. Management is doing a fine job of supporting the stock price with an attractive dividend and share repurchase program.
Pfizer is highly profitable, with operating margins of around 40%. However, the future depends upon progress with its pipeline of new drugs, restructuring initiatives, and international sales developments. Foreign sales account for about 60% of total revenues.
The FDA recently approved Pfizer’s drug Tofacitinib, a treatment for rheumatoid arthritis with blockbuster potential. In December 2012, the FDA approved blood thinner Eliquis, another likely blockbuster that Pfizer developed with Bristol Myers Squibb Co. (NYSE:BMY). Xalkori was approved in August 2011 for treating NSCLC. Another promising arthritis drug under development is Xeljanz.
Developing new products is always a risky endeavor, as proven by disappointment in 2012 along with success. Pfizer had much hope for bapineuzumab to treat Alzheimer’s Disease. Results from two trials released in the second half of last year did not reveal statistically significant benefits. Pfizer and its partner Johnson & Johnson (NYSE:JNJ) withdrew from further development.
Pfizer Inc. (NYSE:PFE) is continuing independent progress with latrepirdine as an Alzheimer’s treatment. The Alzheimer’s market is enormous, comprising 5 million people in the US and 26 million worldwide.
Past growth at Pfizer Inc. (NYSE:PFE) was amplified by acquisitions. These purchases consisted of Warner-Lambert in 2000, Pharmacia in 2003, and Wyeth in 2009. Pfizer sold its nutritional products business to Nestle for $11.8 billion in November 2012.
Pfizer plans to spin off up to 20% of its Zoetis animal health business in 2013. The remainder of Zoetis might be offered to Pfizer shareholders in exchange for Pfizer shares. Zoetis has a broad line of feed additives, vaccines, antibiotics, and veterinary products. Pfizer’s purchase of King Pharmaceuticals in February 2011 provided health products for large animals. The animal products division generates over $4 billion of annual revenue. By comparison, sales of consumer healthcare products total around $3 billion per year. The anticipated spin off is compelling for Pfizer shareholders. An autonomous operation with the best product line in its industry is an attractive investment.
Pfizer revenues have declined in recent quarters, primarily as a result of generic competition for Lipitor. About $5 billion in declining annual revenue is attributable to patent expirations. That was slightly offset by continued strong sales for Lyrica, Celebrex, and Viagra.
Both the Animal Health and Consumer Healthcare units are experiencing operational sales growth in the middle single digits. Demand for animal health products increased across the entire product portfolio, especially in key geographic areas. Higher operational sales for consumer healthcare is primarily a result of products added by acquiring Ferrosan Consumer Health in December 2011 and Alacer Corporation in February 2012. The main consumer product is pain reliever Advil, with roughly 40% of segment revenue.
Pfizer still has a strong group of patent-protected drugs. These include Lyrica, a treatment for nerve pain with $4 billion of annual revenue. Arthritis drug Enbrel has over $3 billion of sales per year. The cardiovascular medication Norvasc has annual sales of over $1 billion. Celebrex and Viagra each provide more than $2 billion of annual revenue.
Prevnar and Prevnar 13 vaccines generate about $3.7 billion in sales per year. At the start of 2013, the European Commission approved expanded use of Prevenar 13 for older children and adolescents aged 6 to 17 for active immunization against pneumococcal infection. Past use of Prevenar 13 was limited to infants and young children.
Prevenar / Prevenar 13 sales have recently declined. This is mainly because past pediatric catch-up doses in the US and developed Europe are no longer needed following vaccination of all eligible patients. Newly approved utilization of Prevenar 13 should revive sales. Pfizer is continuing its global effort to provide Prevenar 13 for those at risk of pneumococcal disease.
Pfizer also has a wide range of other products delivering considerable revenue. These include anti-infective and antipsychotic treatments plus specific medications for glaucoma, incontinence, kidney cancer, and female hormone replacement.
Commensurate with falling revenue at Pfizer is declining profit, which is also negatively impacted by unfavorable foreign exchange. However, according to projections by IMS Health, the primary growth in global pharmaceutical sales this decade will occur in emerging markets. By contrast, IMS expects much slower growth for developed countries.
Pfizer’s operational sales in emerging markets were increasing in the middle single digits during 2012. Most of the volume growth occurred in China, Mexico, and Russia. Promotional efforts in these regions focused on Lipitor, Lyrica, and Norvasc.
Opportunities for the Stock
The prospects for Pfizer Inc. (NYSE:PFE) stock depend upon stable financial performance from existing product diversity, restructuring initiatives, and international positioning coupled with investor patience as newly developed products enter the market. Pfizer’s P/E ratio remains below the industry average. A market P/E for Pfizer would deliver a 12% price increase. The below market valuation will not last long as cash flow rises from newly approved pharmaceuticals, growing sales in emerging markets, and a sound drug pipeline.