Pfiltering Through Pfizer's Year

I guess a public company must take its victories however it can get them. Yesterday, Pfizer (NYSE: PFE) released its 2007 earnings numbers, displaying year-over-year earnings growth powered by foreign currency gains.

Though several of Pfizer's top drugs faced new generic competition in 2007, the company's revenue rose 1% for the year. Adjusted net income also grew in 2007, thanks to a $610 million positive foreign currency gain. What would have been a roughly 2% decline in net income became a 2% gain for the year. Full-year adjusted earnings were $2.20 per share.

As with all equities, Pfizer's past matters less than its future. The company has already issued guidance indicating that 2008 revenue should roughly match 2007 levels, with adjusted net income up slightly. Pfizer's got many moving parts, including the effects of stock buybacks and the use of non-GAAP figures to play the pro forma earnings-per-share game. Given that complexity, Pfizer's operating cash flow guidance is probably the best way to gauge its progress in preparing for the 2011-2012 patent expirations for sales powerhouses Lipitor and Viagra.

Despite what it calls a "painful" cost-cutting campaign, Pfizer's cash flows from operations are expected to only reach 2006's levels, in the $17 billion to $18 billion range. Even for a stagnating drugmaker like Pfizer, though, that kind of cash will go a long way. The company also hiked its dividend another 10% and authorized another $5 billion in share buybacks for 2008.

None of this, however, addresses whether Pfizer is a good value proposition. My views on the subject are fairly clear, and recent setbacks for competitors such as Merck (NYSE: MRK) and Schering-Plough (NYSE: SGP) probably don't change the outlook for Pfizer's top drugs much.

Favorable foreign currency movements and stock buybacks can only juice Pfizer's earnings for so long. Drugs representing more than one-third of its most recent quarterly revenue will lose patent protection by 2012. With the weakest late-stage new drug pipeline of all the large-cap pharmas, Pfizer faces a daunting three years ahead. Not even a future blockbuster biologic acquisition would solve all its potential woes.