Pfizer Looking A Little Tired

By Stephen D. Simpson, CFA | July 30, 2013 AAA

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.

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