In Need of a Blockbuster Drug Now
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Pfizer (NYSE: PFE) recently reported results for the second quarter and showed a decline of 9% in revenue to $15.1 billion in line with the expectations of analysts but, surprisingly, showed a 25% increase in net income to $3.2 billion. The decline in sales had been expected because of the loss of patent protection on its best-selling drug Lipitor in November, but the strengthening of the US dollar also affected international revenues. The bottom line was however increased because of the reduced expenditure on research and development. Pfizer, which is in the business of pharmaceuticals, animal health, consumer healthcare and nutrition, is going to divest its non-core businesses to focus on pharmaceuticals.
The company entered the year 2012 without exclusivity for Lipitor and sales declined more than 50% to $1.2 billion in the second quarter from $2.6 billion for the same quarter in the previous year. In the United States, the decline in sales was 75% to an insignificant $296 million. There was loss of patent protection on other drugs such as Geodon. Primary drugs such as Celebrex and Lyrica and specialty drugs such as Enbrel and Prevenar showed encouraging growth. International sales declined because of the problems in Europe but, excluding the 6% impact of currency translation, emerging market growth was 14% being driven by Russia and China. International sales now account for some 60% of total sales. Animal and healthcare sales grew by 7% and 11% respectively and the company is preparing to spin off the animal business while the divestiture of the healthcare business is in progress. The company has been cutting costs aggressively to counteract declining sales, but it was a little surprising to see an almost 20% decline in research and development expenditure. In addition to Lipitor, the company will lose exclusivity to several other drugs in 2012 such as Viagra, Enbrel and Detrol and badly needs to find a new blockbuster drug.
The last part of the company's plan to focus on new drugs has now been put into place and the separation of the animal health business will start soon. Part of its agenda is to make it better at new drug development following the loss of exclusivity for Lipitor. The company has three drugs under development which could be in the market next year and each one has the potential to generate over $1 billion each in revenues. In addition to treatments for heart disease, Alzheimer's and rheumatoid arthritis, Eliquis, a blood thinner, could receive approval in the first half of 2013. In August, Pfizer will start the process of selling up to 20% of its animal care business in an IPO. In addition to cost-cutting, the company is also maintaining earnings per share through stock buybacks which amounted to $9 billion in the last year and is expected to total $5 billion in the current year. The company has plenty of cash and can satisfy its investors through dividends and stock buybacks till the R&D initiative produces results.
However, the regulators may delay approval for tofacitinib, a treatment for rheumatoid arthritis and the drug is expected to compete with Humira, the blockbuster from Abbott Laboratories (NYSE: ABT). Bapineuzumab, a drug for Alzheimer's disease which is being developed with Johnson & Johnson (JNJ) and Elan, has not passed the first of four crucial, final-stage clinical trials; results from the next trial will be available later this month. The company is looking for marketing clearance for Eliquis, a blood thinner being developed with New York-based Bristol-Myers Squibb (NYSE: BMY). The application was rejected by the FDA in June and more information from clinical trials was sought from the companies. According to one analyst, sales from the drug, if approved, would be as much as $2.5 billion by the year 2015.
It will be interesting to see how the new drug development model will work out because the new drug pipeline is a vital part of the business as existing products lose exclusivity and patent protection. Pfizer has had clinical trial failure, the latest example of which is bapineuzumab and the high rate of failure is attributed because of the lack of knowledge about the behavior of these molecules in patients suffering from the disease. The problem is being sought to be remedied by partnerships with university scientists who research the behavior of molecules. In the past 1 1/2 years, Pfizer has created 21 such partnerships. The whole pharmaceutical industry is shifting focus because acquisitions have proven ineffective at boosting in-house drug development. Other pharmaceutical companies are shifting focus as well. Novartis (NVS) is partnering with biotechs to develop drugs while Sanofi (NYSE: SNY) is investing in start-up businesses. Sanofi and Merck (MRK) have also initiated partnerships with universities and research scientists. Crucially for Pfizer, these low-cost partnerships fit in well with the company's cost-cutting plans.
The bad news for Pfizer shareholders is that Wall Street is not particularly kind to companies with low growth rates and it is difficult to see how the current new drugs under development are going to spur substantial growth. After all, the company is the largest pharmaceutical company in the world by revenues and has some $60 billion in existing sales. Aggressive cost-cutting may see growth in profitability, but a big win is required in terms of one or two blockbuster drugs. Pfizer is not substantially undervalued at the moment, unlike Sanofi or Teva (TEVA). It is nevertheless a solid company and may suit you if you are looking for a relatively low-risk investment and are content with slow and steady gains. If you have an existing investment, continue to hold because of the limited downside and the rewards will follow, even if slowly.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services recommend Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.