At some point this bull market in all things health care will fade out, and I wonder if Pfizer (NYSE:PFE) shares will maintain this sort of valuation when that occurs. With the spin-off of Zoetis (NYSE:ZTS), years of restructuring, and a reorganization that will create “innovative” and “value” cores, I have to think that Pfizer management has pulled every trick out of its bag aside from a full break-up of the company. What's more, while there are some worthwhile products in the pipeline, I think the company is looking at pretty sluggish long-term growth as those new products will struggle to offset the loss of exclusivity on other lucrative drugs.
Q2 Comes Out Okay On Better Margins
Pfizer's second quarter was like so many other pharma reports this quarter – okay, but with most of the good news coming from lower spending (better margins) and overall sluggish sales growth trends.

SEE: Evaluating Pharmaceutical Companies
Revenue fell 7% as reported, or 4% on an operating basis, with pharmaceutical sales down 5% on that same operating basis. Although Lyrica was up 13% and Celebrex was up 10%, Prevnar (down 1%) and Enbrel (up 1%) were pretty weak. Pfizer's consumer health business saw 5% growth this quarter, which is pretty good for that space.
As mentioned, margins were a big help in Pfizer making this quarter. Gross margin improved more than a point on an adjusted basis, and although operating income declined 16%, Pfizer still squeezed out a small beat on an operating basis.
A Modest Delay In Xeljanz Data Doesn't Change The Pipeline Outlook
Pfizer could certainly use some positive news with respect to its pipeline. Although the recent decision by the CHMP to reaffirm the rejection of Xeljanz sets that product back by years in Europe, this wasn't really a surprise after the initial rejection earlier this year. Even so, it's still curious to me that European regulators refused this drug on safety concerns given that Europe's approach tends to be more relaxed in comparison to the FDA.
Investors will also note that the company has announced that the read-out on Phase 3 data of Xeljanz has been pushed back by a quarter or two. Although this isn't a big deal, the company's excuse (which, in essence, was “this is hard”) seemed a little weak. It's also worth noting that AbbVie's (Nasdaq:ABBV) Humira is still performing pretty well and Xeljanz's pricing could be a headwind to wider adoption, with Celgene's (Nasdaq:CELG) apremilast on the way and management's intention to price it at a meaningful discount to biologics like Humira.

SEE: 8 Stages Of New Drug Development
With over $10 billion of revenue at risk of losing exclusivity through 2015 (I'm excluding most of Enbrel for the time being), the Street-average estimate of $8.5 billion in pipeline revenue contributions for 2019 looks a little thin. To be fair, palbociclib looks like it has a lot of potential in HER2- breast cancer (Roche (Nasdaq:RHHBY) is stronger in HER2+), and I believe the company's Prevnar-13, staph, and meningitis B vaccines are probably underrated, as the former could become a routine adult vaccine and the latter two could become staples in at-risk populations. Even so, there aren't a lot of drugs behind those where investors are likely to get really excited, and that could make Pfizer a bigger player in licensing/M&A deals in the coming years.
Will Reorganizing Lead To Improved Performance?
Ahead of this earnings announcement, Pfizer management unveiled another restructuring/reorganization plan that will see the business split into three units – one “value” core, and two innovation cores split between vaccines/oncology/consumer health and a wide swath of immunology/metabolic/CV/pain/neuro/rare disease.
I have little doubt that this is going stoke expectations that the company will eventually break-up entirely at some later date. I'm skeptical, though, as to whether the reorganization is going to lead to meaningfully better financial results. I've seen a lot of different corporate structures in Big Pharma, but the constant thread is that companies that do well in their preclinical R&D and post-approval marketing efforts ultimately do pretty well. I'm not really sure that this new structure enhances either of those, so consider me a skeptic for the time being as it pertains to the value this move creates (though I'm not skeptical at all about the value perception it may create).

SEE: Pharmaceutical Sector: Does The FDA Help Or Harm?

The Bottom Line
Pfizer is hardly the only pharma company with an iffy pipeline, but I'm not that enamored of the valuation today. I think that low single-digit growth is about the most the company will manage, and I wouldn't pay much more than $27 for that. As such, I suppose Pfizer is a decent hold so long as this healthcare bull market lasts, but this wouldn't be my pick for a long-term holding in pharma.
Disclosure – At the time of writing, the author owned shares of Roche.

Related Articles
  1. Stock Analysis

    Forest Laboratories: An Activist Investment Analysis

    Find out how patience and perseverance paid off big-time for billionaire activist Carl Icahn during his four-year fight with Forest Laboratories.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Stock Analysis

    Moderna Therapeutics: An IPO Candidate in 2016?

    Find out the reasons why 2016 may be the year when highly valued biotech company Moderna Therapeutic files for an initial public offering (IPO).
  4. Investing News

    Zika: Study Says This Device Could Protect You

    New research just uncovered an inexpensive, commercially available device that might help fight off the mosquito that carries the dreaded Zika virus.
  5. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  6. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  7. Fundamental Analysis

    How Pharmaceutical Companies Price Their Drugs

    Learn more about how pharmaceutical companies price drugs, why prices are often very high and why it can be difficult to settle on a suitable price.
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Stock Analysis

    Jana Partners: An Activist Investor Analysis

    Learn about Jana Partners, a hedge fund founded by Barry Rosenstein. Read about new positions in ConAgra and Qualcomm the fund took in 2015.
  10. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center