Pfizer (PFE) reported strong third-quarter results Tuesday that showed decent top-line growth thanks to favorable foreign exchange and solid income expansion due to excellent cost controls, which offset product losses of exclusivity. We are maintaining our fair value estimate.
Pfizer’s top line jumped 7%, which was driven almost entirely by favorable foreign exchange (international revenue growth was 15%; 4% operational with the balance forex). US revenues continue to decline and also fall as a percentage of total revenue (now 40%, was 44%). Operationally, Pfizer experienced the strongest growth in nutrition, animal health (due to the addition of legacy King products), and consumer healthcare. Revenue from its largest segment, Primary Care, was essentially flat, while sales from its second-largest segment, Specialty Care, fell 5% from the same period a year ago. As it relates to Primary Care, growth in Lipitor in the US and from Celebrex (up 11%), Lyrica (up 27%), and Pristiq (up 24%) helped to effectively offset the loss of exclusivity of Aricept in the US and Lipitor in Canada and Spain. Prevnar 13 revenues in the US and the loss of exclusivity of Vfend and Xalatan in the US hurt Specialty Care revenues. Still, emerging market revenues across the board continue to be strong, save the loss of exclusivity of Lipitor in Brazil and Mexico.
The firm’s operating income was particularly impressive during the period thanks to tight cost controls. Though adjusted cost of sales advanced 7% from the same period a year ago, Pfizer did a better job with selling and administrative expenses and research and development expenses, which fell 5% and 8% operationally (ex forex), respectively. Net-net, adjusted total costs fell 3%, which we view as a solid showing in the quarter. Adjusted income advanced 11%, while diluted earnings per share jumped 15% as the firm bought back approximately 247 million shares since the same period last year.
Looking ahead, Pfizer may face some tough sledding, given that it will lose exclusivity of its largest drug, Lipitor, in the US later this month and in a number of other countries shortly thereafter. Lipitor generated revenue that was more than 2.5 times that of the next largest revenue-generator (Prevnar / Prevenar 13) in its third quarter. Ranbaxy Labs and Watson Pharma will start selling the generic form of Lipitor after November 30. Though Pfizer plans to rigorously defend Lipitor sales, we expect the firm to lose roughly 90% of Lipitor revenue to generics over the next year to 18 months. That said, management did highlight the potential for a number of late-stage pipeline opportunities: Xalkori (for the treatment of ALK-positive advanced non-small lung cancer) and Eliquis (for stroke prevention in patients with atrial fibrillation). The company also upped its 2011 adjusted earnings-per-share target to $2.29 on the high end (was $2.26) and reaffirmed its 2012 financial guidance, which reflects relatively modest bottom-line expansion at the high end of the guided range ($2.35). We think such expectations are achievable, especially in light of the firm’s robust share repurchase program.
All things considered though, we’re less than thrilled with Pfizer. The firm will be losing exclusivity on its $10-billion-per-year blockbuster drug Lipitor at the end of November, and its earnings-per-share expansion is largely driven by buybacks. Though the firm is significantly undervalued, we think there are better opportunities out there.