Will Pfizer Continue to Trade Up in 2012?
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The financial reports of Pfizer Inc. (NYSE: PFE) for the second quarter of 2012 revealed the company continues to present high profit margins. On the other hand, there was a decline in revenues that could continue in the following quarters. Let's check what is next for this company and how it compared to other companies in its industry.
The company’s revenues have declined by nearly 9% during Q2 2012 compared to Q2 2011. According to the company, the fluctuations in the exchange rates were responsible for nearly 3% of the drop and the rest of the decline – which was 6% – was due to a deteriorating operations. Among the company’s segments the “primary care” sales fell by 32% (31% of the decline was due to a drop in actual sales and only 1% due to forex changes). The main reason for the drop was due to the company’s loss of exclusivity of Lipitor in the U.S as of November 2011. Besides the loss of the exclusivity in other products such as donepezil, there was also a decline in sales due to a rise in competition in the U.S in other products.
But beside the drop in sales that reflect in the company’s current and future earnings, the company didn’t have much success in recent weeks: according to a recent article, JNJ and Pfizer have failed to improve symptoms of Alzheimer patients in their first out of four studies testing their drug. The two companies have also stated they have decided to end the developments of an intravenous Alzheimer drug. Eli Lilly has also been working on a treatment for Alzheimers and will present its recent results during this quarter. Some analysts claim Eli Lilly’s Alzheimer treatment will fail late stage testing. Thus, all three companies aren’t showing any headway, for now, in tackling a treatment for Alzheimers.
There are also reports that Pfizer's phase III trial for its drug Torisel, a treatment for patients with kidney cancer, has failed.
The company’s development of drugs is, obviously, the main source of growth. There weren’t big reports of new developments or headlines that could suggest there is something in the near future that could rekindle the company’s growth.
In this respect, note that there was a decline in Research & Development by 19% (from Q2 2011 to Q2 2012). This decline is due to the company's discontinuation of therapeutic areas and other such R&D programs. If this trend will continue, it could reduce the chances of the company to reach medical breakthroughs and thus lower the possibility of future growth from this direction.
The company is expecting to issue an IPO for the Animal Health Business, Zoetis for a minority stake – 20% of the company's ownership. Some say this IPO is made to payoff the Pfizer's debt.
S&P500 and Pfizer
When comparing the performance of Pfizer’s stock to the S&P500 index, the company’s stock rose by a very similar rate to that of the S&P500 index. The chart below presents the strong relation between the two. During 2012 Pfizer’s stock rose by 11.5%; the S&P500, by 11%. The linear correlation between the two was 0.52, which means (under certain assumptions) that the 28% of the company’s stock volatility could be explained by the fluctuations in the S&P500.
Operational Profitability
Following the publication of the second quarter reports it seems as if Pfizer has done a bit better than other Pharma companies in terms of operational profitability. But the company didn’t outperform other Pharma companies in the previous quarters. The table below compares the operational profitability of Pfizer, Johnson & Johnson (NYSE: JNJ) and Eli Lilly & Co. (NYSE: LLY). It shows that despite the recent hike in Pfizer’s profitability in the second and first quarters of 2012, during 2011 the company’s profitability was well in the middle of the pack.
In terms of dividend among the three, Eli Lilly is offering the highest yield at 4.6% compared with 3.7% for Pfizer and 3.6% for Johnson & Johnson.
The Bottom Line
The company has done well in recent months, but there are some points to consider that could curb the company's rally in the upcoming months including growing competition, losing exclusivity for certain drugs, and no significant headway in developing new drugs for now. All these factors could mount out to another decline in sales which will curb the rise in the company's stock value in the upcoming months.
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
