Pfizer Looks Like a Bond Replacement: Earnings Preview
by Ryan Barnes
24/7 Wall St.
Pfizer (PFE) reports on Friday, and just like tearing off a band-aid, investors are hoping the earnings release to be quick, and relatively painless. Nobody’s expecting anything spectacular on the “good news” front, while many issues both short and long term swirl around the company like vultures (or maybe that’s just the generics). Just to get things framed, let’s start with the boilerplates:
1st quarter estimates are $0.57 EPS and revenues of $11.9 billion; estimates for the second quarter call for earnings to be down sequentially, with $0.54 expected. Going out a little further, revenue growth is supposed to be essentially flat for both 2007 and 2008, after which it becomes anybody’s guess.
The company suffered a major setback when promising HDL drug torcetrapib was shut down in the middle of clinical trials; some estimates on this one had it selling $4-5 billion annually in the U.S. alone. While it won’t affect estimates for this year and next, it puts a huge hole in the middle of Pfizer’s lineup. Torcetrapib was supposed to be a combo drug that utilized top seller Lipitor, which is already coming down from peak sales levels.
Lipitor made up more than 25% of revenues in 2006, but is expected to only sell through $1.9 billion domesticaly in the 1st quarter, down 4% year-over-year. Worldwide revenues should still eke out a small gain thanks to overseas growth and a 5% price hike back in January. The U.S. market for Lipitor is expected to die slowly from here, with Merck’s competing Vytorin expected to grow 60% in the past quarter. We gave a preview of Merck’s earnings here.
While Lipitor’s main patent is good until 2010, pending patent losses at PFE figure to be a real revenue dampener for the remainder of year; the most notable being Norvasc, a $4.9 billion seller worldwide in 2006. Only Mylan’s (MYL) product is out for the next six months, but then of course there will be a swath and sales levels will finish their plummet. Antidepressant Zoloft and antibiotic Zithromax both lost exclusivity in 2006, and allergy medicine Zyrtec is coming off later this year.
After looking through the most recent annual report, it is difficult to see Pfizer having the capacity to fill all those billions in decelerating sales. While the company has a few $1 billion drugs that are growing, they have no (again, not one) drugs with sales over $2 billion annually that are still on the upswing.
When looking over the near-term options, there is a large open interest (but quiet trading) in the April $25 PUTS (that also expire on Friday); these could see large trading volumes if the company makes any real guidance changes on Friday. It will be curious to see what kind of downside this stock actually has in the coming months, as the 4.30% yield alone is a solid backstop.
In addition, valuation will still be in the low teens barring a cataclysmic event, as the company currently trades for less than 11x trailing earnings and has dozens of drugs in the upper testing stages. We may be calling Pfizer the first Pharma REIT in a few quarters, as the $22 to $25 price range may be a relative floor but growth will be secondary to “asset management” of the drugs. It is also still a wildcard as to what the company will do with its billions of dollars added on from the sale of its consumer products unit to Johnson & Johnson (JNJ)
Source: 247WallSt.com
RELATED READING:
- Pfizer and Mylan Fight to Defend Norvasc Exclusivity
______________________
24/7 Wall St.
Pfizer (PFE) reports on Friday, and just like tearing off a band-aid, investors are hoping the earnings release to be quick, and relatively painless. Nobody’s expecting anything spectacular on the “good news” front, while many issues both short and long term swirl around the company like vultures (or maybe that’s just the generics). Just to get things framed, let’s start with the boilerplates:
1st quarter estimates are $0.57 EPS and revenues of $11.9 billion; estimates for the second quarter call for earnings to be down sequentially, with $0.54 expected. Going out a little further, revenue growth is supposed to be essentially flat for both 2007 and 2008, after which it becomes anybody’s guess.
The company suffered a major setback when promising HDL drug torcetrapib was shut down in the middle of clinical trials; some estimates on this one had it selling $4-5 billion annually in the U.S. alone. While it won’t affect estimates for this year and next, it puts a huge hole in the middle of Pfizer’s lineup. Torcetrapib was supposed to be a combo drug that utilized top seller Lipitor, which is already coming down from peak sales levels.
Lipitor made up more than 25% of revenues in 2006, but is expected to only sell through $1.9 billion domesticaly in the 1st quarter, down 4% year-over-year. Worldwide revenues should still eke out a small gain thanks to overseas growth and a 5% price hike back in January. The U.S. market for Lipitor is expected to die slowly from here, with Merck’s competing Vytorin expected to grow 60% in the past quarter. We gave a preview of Merck’s earnings here.
While Lipitor’s main patent is good until 2010, pending patent losses at PFE figure to be a real revenue dampener for the remainder of year; the most notable being Norvasc, a $4.9 billion seller worldwide in 2006. Only Mylan’s (MYL) product is out for the next six months, but then of course there will be a swath and sales levels will finish their plummet. Antidepressant Zoloft and antibiotic Zithromax both lost exclusivity in 2006, and allergy medicine Zyrtec is coming off later this year.
After looking through the most recent annual report, it is difficult to see Pfizer having the capacity to fill all those billions in decelerating sales. While the company has a few $1 billion drugs that are growing, they have no (again, not one) drugs with sales over $2 billion annually that are still on the upswing.
When looking over the near-term options, there is a large open interest (but quiet trading) in the April $25 PUTS (that also expire on Friday); these could see large trading volumes if the company makes any real guidance changes on Friday. It will be curious to see what kind of downside this stock actually has in the coming months, as the 4.30% yield alone is a solid backstop.
In addition, valuation will still be in the low teens barring a cataclysmic event, as the company currently trades for less than 11x trailing earnings and has dozens of drugs in the upper testing stages. We may be calling Pfizer the first Pharma REIT in a few quarters, as the $22 to $25 price range may be a relative floor but growth will be secondary to “asset management” of the drugs. It is also still a wildcard as to what the company will do with its billions of dollars added on from the sale of its consumer products unit to Johnson & Johnson (JNJ)
Source: 247WallSt.com
RELATED READING:
- Pfizer and Mylan Fight to Defend Norvasc Exclusivity
______________________
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