Monday, January 27, 2014

Pfizer Beats Estimates as Investors Await Potential Breakup- Discussion Topic 10/31/2013

 Pfizer Inc., the world’s biggest drug maker, reported third-quarter profit that beat analysts’ estimates as the company cut costs and sales of its top vaccine and pain drugs increased.
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  1. Outperform, Thesis: Buy, or hold
    1. Earnings 58 cents, 4% higher than analysts expectation, NI decreases 19% because Lipitor (once the company's top product) lost its patent protection, and Zoetis spin-off incurred ongoing losses, costs feel 4%.
    2. Business reorganization: generic&off-patent, 2 brand names. It showed management's intention to improve business focus. Future impact: R&D and SG&A expenses are expected to be lower due to specialization.

    1. Pfizer is expected to leverage its market leadership in penetrating generic drug markets to recoup lost from patent expiration.
    2. Costs are likely decrease in the future and revenue are likely to increase at a higher rate because more products will gain popularity in the future, specialization brings down costs.

    1. Lyrica sales increased 9.1% to $1.14 billion.
    2. Eliquis and Xeljanz had slower starts than analysts projection, but are expected to grow faster after gaining market acceptance.
    3. Upcoming products: Bococizumab, final stage, Tanazumab, approval pending, Palbociclib for breast cancer, in Clinical trial phase II

    Macro factors:
    1. Some mega-buster drugs lost patent protection in 2011 or 2012, and more in 2013-2016 (
    2. Strong forecast growth rates: CAGR:5.3% 2012-2017.
    3. Monopolistic pharmaceutical industry: top 10 companies account for more than 1/3 of the sales.

  2. Buy or hold in the short term, sell in the long run.

    1. Their 2012 income statement is negative. In 2012, sales decrease 12.5% and in 2013 the sales estimated by Thomas one decreased to 12.1%.Its gross profit is going to decrease 11.8%in 2012.Its 2012 expense SGA decrease by 15.9% and R&D 12.9% Net income decreased by 9.7 %

    2.Pfizer major products future revenue is a steady increase but its R&D costs also increase. As a result, its profit margin will decrease in the long run. Currently, Pfizer has 3 major products which contributes their revenue in 2012 is closed to 60% which includes Diversified Legacy Drugs 32%, Prevnar & Other Anti-Infective Drugs constitute 16% of the Lipitor 12%. Right now since Pfizer has been reducing its focus on the segment and is in process of selling its nutrition business. Prevnar will increase in the future.

    3. Negative Key trend
    ● loss of patents impacting sales
    ● growing threat of generic products
    ● lack of approval for Biosimilars by FDA
    ● Globalization of healthcare reforms

  3. Investment thesis: Hold for long term

    -Third quarter profits declined by 19%
    -To get higher profits, PFE has to cut cost, resulting a lower R&D budget and thus a less powerful engine to the future sales.
    -Eliquis, the drug researched by PFE together with BMY and was initially estimated very promising, turns out to be lackluster.
    -Lipitor lost patent protection from 2011 and began facing competitors, whole sales were down 29% from one year ago, but the drug still beat expectations by $55 million for earnings of $533 million

    -PFE total growth rate in the past five years is 74.20%, from 17.71 to 30.85. That’s an excellent performance in the whole market.
    -Divide into 2 brand-name units: Generic-drug and off-patent business, and report separately next year.

    -Cutting cost is OK in short term. However, it definitely cannot be the long-term policy. PFE has to find a powerful engine for the future growth.
    -PFE is too optimistic about Eliquis. The much higher expectation from internal and external investors makes the market disappointed.
    - Although PFE lost patent protection, I think it can continue producing Lipitor and use its reputation and loyal consumers to make profits in the coming 2-3 years. After 2-3 years, I think the profit margin will decline a lot and PFE can quit at that time.
    -Reorganization is benefit to PFE. The R&D can be more concentrated.
    - Palbociclib is promising and PFE should put more percentage of R&D expense on it.
    -PFE should consist on Lyrica and Prenar to generate more profits.
    -Although some difficulties currently, I’m confident about the future of PFE.

  4. Investment Thesis——Neutral
    Buy or sell criteria—— 1) 2014 Q1’s performance; 2) new patents and pipeline in 2015

    1) The good aspects of PFE:
    • Performed well with some products/ Prevnar (pneumococcal; revenue rose 1.1% to $959m)/ Inlyta and Xalkori (oncology; 26% growth)/ Lyrica (pain medicine; 9.6%)
    • Wyeth Acquisition. Diversification/Vaccines/Consumer Healthcare unit
    • Deep pipeline. 78 programs in 2012/Palbociclib (5b)/ Duavee
    • The cost cutting ability

    2) The bad aspect of PFE:
    • Patent Expiration and generic competition
    • The uncertainty of the new company separation; 3 segments

  5. I have a more pessimistic view on PFE.
    Sales declining worldwide by 2.5% in the 3rd quarter. While revenues generated in United States remained roughly the same, international sales from biopharmaceutical products, the main source of Pfizer’s revenue, declined by 5%. Out of the top 25 brands Pfizer sold internationally, 17 of them saw declines in sales in the 3rd quarter.
    I think one of the major issues that contributed to Pfizer’s decline in sales is its losing marketing exclusivity due to patent expiration across its product line. The sales from Lipitor, once the world’s top-selling drug, declined by 29%, and has been declining dramatically since two years ago, when the patent expired. Viagra, a rock-star product, has declined by 11% worldwide, and by 28% internationally, largely because that its patent was invalidated in Canada a year ago. Correspondingly, the market share has dropped from over 80% to low 40% in the last decade, and will probably be dropping going forward.
    Despite the fact that earnings beat analysts’ estimates, the net income declined by 19%. The fact is that cost from R&D has also be declining, which is much needed to support long-term revenue growth. I found out that during a recent interview, CEO Ian Read mentioned that Pfizer is “going to flex its R&D spending within reasonable, prudent limits, according to the opportunities they have”. R&D is key to any brand biopharmaceutical business. Whatever the company is planning to do, consistently lowering the R&D efforts is going to have a substantial negative impact on the company’s ability to generate revenue.
    The interesting thing I found in the article is that Pfizer is planning on separating results of its three units. And the CEO also commented that the “generic business could still be competitive inside Pfizer, or as a U.S.-based stand alone.” While Pfizer probably won’t move headquarter from the U.S. to overseas, the company is likely planning on a spin-off of the generic business in the next couple of years.

  6. nvestment Thesis: I will recommend short-term buy and long-term hold for Pfizer (PFE).

    Reasons to Buy:

    1. Key segments sales performance: Pfizer's cancer drugs skyrocketed 24% this quarter to $407 million in revenue,
    2. New cancer agents: Pfizer's patent-protected drugs enjoyed increases in sales. Part of this surge can be attributed to several new cancer agents.
    3. New trials and new patents: Positive expectations on trials of a number of promising experimental drugs and from studies testing new uses of its already marketed drugs.
    4. Cost efficiency: Pfizer will break the company into two or three pieces in order to cut operation cost. Cost will decrease in near future

    Reasons to Sell:
    1. Declining in sales: Sales fell 2.5 percent to $12.6 billion, from $13 billion a year earlier, or $14 billion including a now-divested animal health business
    2. Patent issue: Pfizer is suffering as cheaper generic versions erode the sales of older drugs, no longer protected by patents that once brought in billions of dollars.
    3. Currency Exchange: Pfizer states unfavorable currency exchange rates cut revenue by two percentage points.
    4. Loss market share in Europe: Pfizer's perhaps more infamous drug, battled generics in Europe less successfully with a 11% decrease in sales this quarter.

  7. Investment Thesis: Buy for now and conservative in the long run (2016)

    Reasons to buy:
    - EPS continuously outpaced the estimated value in the last quarter. Pfizer may have a higher than expected stock price in the following year and its stock price may also gradually increase given this positive information.
    - Promising future on Lyrica and Prenar. Growth in sales in the last quarter.
    - Cost-cutting initiated. Higher net profit can be achieved. Company forced to focus more resources on its most profit-making products.
    - Share buybacks deliver positive message
    - Slow start on Xeljanz and Eliquis and may generate more growth in sales in the following years
    - Several new products are in Pfizer’s development pipeline. Can estimate a revenue growth after these products are launched.

    Concerns in the long run:
    - Patent expiries faced by several products. Sales may be hurt through 2016.
    - Fierce competition in generics business

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