Can This Company "Compound" Another Miracle?
Ramesh 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) reported third quarter results on Thursday, November 2, 2012, which was weak, disappointing and did not meet analyst expectations without excluding one time charges. This company, once a purveyor of the world’s leading drug – Lipitor reported dismal sales of Prevnar, its bestselling vaccine for children, further decline in Lipitor sales and uneven growth in sales in emerging markets due to government purchase programs. Pfizer’s block buster drug, Lipitor lost patent protection status about a year ago and the company has sought to stem the defection to much cheaper generics by doctors and customers. Turns out, the bleeding continues and eats further into its bottom-line.
Analysts expected $0.49 cents per share and Pfizer reported $0.43 cents per share. According to the company, Lipitor’s declining sales; especially in “developed Europe” was the primary reason for the poor Q3 performance, thus showcasing the huge impact that this drug has had on the company’s revenue. The company also blames the “unfavorable impact of foreign exchange,” as another factor because international revenues represent 60% of the total. Also cited is the loss of patent protection for several other drugs such as Xalatan and Geodon in “developed Europe” and the USA. In case you were wondering, “developed Europe” consists of the countries that exclude formerly eastern European countries, Russia etc., although I don’t see a definitive list anywhere.
Competition From Generics
So, Pfizer’s Lipitor sales is in decline, its pediatric vaccine – Prevnar is losing ground and loss of other patent protected drugs is sending customers into the open arms of aggressive manufacturers of generics such as TEVA Pharmaceuticals (NYSE: TEVA) and Ranbaxy Pharmaceuticals (RBXZF.PK). Another manufacturer of generics, Watson Pharmaceuticals (NYSE: ACT) actually has an agreement with Pfizer to redistribute the generic version of Lipitor made by Pfizer itself. Watson is especially interesting. It has had phenomenal growth, its stock has practically doubled over the past four years and it reported excellent Q3 results with $1.35 per share versus analyst estimates of $1.28 per share. Watson Pharmaceuticals also just completed the acquisition of Actavis group, its partner from Switzerland for $5.9 billion and also guided earnings per share for 2012 at a range higher than analyst estimates. In 2013, Watson will rename itself as Actavis and after the acquisition is now the world’s third largest generics manufacturer after Teva and the generic unit of Novartis (NYSE: NVS) called Sandoz.
Ranbaxy actually was the first to legally challenge Pfizer’s Lipitor patent and is a large Indian Pharmaceutical manufacturer with a huge customer base in India alone. Ranbaxy has a large customer base abroad, is well positioned in the African market and is making large inroads into the European and American market as well. The Indian population has a vastly disproportionate incident of heart diseases, so expect Ranbaxy to profit from increased revenue derived from generic Lipitor sales. Teva is an Israeli manufacturer with substantial presence in the US market and reported Q3 revenues of $5 billion. This actually represented a loss of $0.09 cents per share versus the consensus estimates of $1.25 per share due to the absorption of one time charges. Still, the market rewarded Teva, post earnings.
Prospects for Another Blockbuster
So, the question is, in the face of fierce competition from generics manufacturers, can Pfizer hope to regain the once hallowed status as “the world’s leading pharmaceutical compounder?” Reading the earnings report and other financial releases and press releases of Pfizer, one does not get the sense that there is another blockbuster drug in the making. The company’s stated strategy appears to be increased share buybacks and sales of some of its core units to companies such as Nestle (NESN.VX). In fact, upon reading the earnings report, it is clear that the sale of Pfizer’s Nutrition unit to Nestle is expected to fuel some if not all of the costs related to the share buyback program. Also, Pfizer narrowed its full year earnings forecast and effectively lowered it. It would be safe to presume that management has no pretensions of "compounding" another mega blockbuster in the same scale as Lipitor! Absent another "miracle drug" in the making, no wonder management is doing whatever is practically necessary in order to entice new Investors and keep existing ones happy.
Strong Push Towards Prescribing Generics
Across the board, in the USA, where Pfizer gets 40% of its revenues, medical insurance companies as well as Medicare and Medicaid are switching the bulk of their pharmacy benefits to generic drug formulations. It is a trend that has now become quite an avalanche. Pharmacy Benefit Managers (PBM’s) such as Express Scripts (NASDAQ: ESRX), now provide patients with a preferred drug list (also known as a “formulary”) and in fact disallow brand name drugs when a generic substitution is available. In the past, doctors were only “encouraged” to prescribe generics if “medically appropriate” and they were asked to check a box on their prescription stating that generic substitution was okay. The difference now is that the doctor might not have a choice anymore when it comes to some brand name drugs on the PBM’s formulary. So, while brand name Lipitor is still available at your local pharmacy, the doctor will need to always prescribe the generic equivalent if the PBM says that the doctor does not have a choice. That's a big, new difference in a scenario where the doctor habitually only prescribes Lipitor!
So, what is Pfizer to do? Make no mistake – the company still has a substantial portfolio which includes an “Animal Health” unit that is also being divested. Pfizer could also materially benefit from the continued implementation of the 2010 Patient Protection and Affordable Care Act (also called “Obamacare”). There are drugs in the making that could potentially turn out to be great money makers but one never knows. It is notable that the company is resorting to share buybacks, unit sales and possible further spin-offs of its established businesses as independent entities. Shareholders are becoming impatient and potential Investors are reluctant to step in until they see better prospects. The two drugs that are awaiting FDA approval are Tofacitinib and Eliquis. Eliquis was actually disapproved by the FDA earlier this year but has agreed to again review their decision in March of 2013. In the meantime, although the stock has appreciated in 2012, right now it is time to hold if you already own the shares and if you plan on buying, do so over the coming months in installments. Pfizer does pay a dividend and is planning to pay a dividend of 0.22 cents per share for Q4.
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