Pfizer's Big Gain on Big Declines

Pfizer (NYSE: PFE  ) shares saw big gains Tuesday -- on big declines. No, that's not a misprint. Shares were up more than 3% after the pharmaceutical giant reported revenue from 2012 was 10% lower than the prior year. Adjusted earnings were down 8%. To put this in perspective, Pfizer gained around $6.6 billion in market cap after reporting sales dropped by around $6.3 billion last year. How did this happen? 

The expectations game (part 1)
Technically, Pfizer's earnings were way up -- to the tune of $4.9 billion more in the fourth quarter of 2012 than the same quarter in 2011. That's not why the company's shares are up, though. The huge earnings surge stemmed from the sale of Pfizer's nutrition business unit to Nestle. 

What made Wall Street happy was that Pfizer's adjusted earnings of $0.47 per share for the quarter beat the average analyst estimate of $0.44 per share. The same held true for revenue. Pfizer reported a little over $15 billion in revenue for the fourth quarter, outperforming the average analyst estimate of $14.37 billion. Even better, actual revenue surpassed the highest analyst revenue estimate of $14.64 billion. 

Analysts undoubtedly expected the loss of patent protection for Lipitor to hurt Pfizer. They were right. Lipitor sales for 2012 dropped by $5.6 billion compared to the prior year. Other drugs experienced significant sales declines also, including Norvasc, Xalatan/Xalacom, and Detrol.

Pfizer won the expectations game without relying on only one or two standout performers. Sure, blockbuster drugs like Lyrica and Celebrex boasted solid sales growth. The animal health and consumer healthcare divisions grew in the single digits. However, the contributions of the company's many lower-volume drugs appear to have made the difference in beating expectations.

The expectations game (part 2)
The more important expectations game for Pfizer now lies ahead. Management announced adjusted earnings guidance for 2013 of $2.20 to $2.30 per diluted share. With average analyst estimates of $2.29 per share, Pfizer must hit near the top end of its current guidance to please Wall Street. Guidance for 2013 revenue was $56.2 to $58.2 billion. The average analyst revenue estimate is $57.5 billion, just a little over the midpoint of Pfizer's range.

How difficult will it be to meet or exceed these expectations? One concern to check off the list is the impact of the upcoming spin-off of Pfizer's animal health business into a new company to be named Zoetis. The guidance numbers reflect a full year of contribution by Zoetis. Management indicated in the earnings conference call that the guidance would be revised in April after the initial public offering.

The toughest challenge in meeting expectations will come from defending market share against generic competitors. Lipitor, Viagra, Xalatan, Geodon and Detrol have all lost protection for their basic patents in the U.S. Pfizer also faces generic threats for Effexor, Vfend, and other products. Pfizer won't face further losses of patent exclusivity for major products until 2014 with Celebrex.  

New products should help make up at least part of the gap from lost sales to generics. Pfizer and partner Bristol-Myers Squibb (NYSE: BMY  ) plan to launch Eliquis this year. The blood-thinning drug could reach peak sales of more than $4 billion, according to Leerink Swann. However, the ramp-up could take some time as Eliquis fights for market share with Boehringer Ingelheim's Pradaxa and Xarelto, which is jointly marketed by Johnson & Johnson (NYSE: JNJ  ) and Bayer.

Another potential rising star for Pfizer is Xeljanz, which already received FDA approval for rheumatoid arthritis and is in phase 3 trials for treating psoriasis and ulcerative collitis. Xeljanz should be a threat to drugs already on the market, such as J&J's Remicade and AbbVie's (NYSE: ABT  ) Humira. The interesting thing to watch will be how well Pfizer can position Xeljanz, which is available as a pill, against Humira, which is administered via injection.  Timothy Anderson with Berstein Research projects that Xeljanz could hit $2.5 billion in annual sales.

What to expect while you're expecting
What should you expect while you're expecting? For one thing, count on additional share buybacks. Pfizer bought $8.2 billion in shares during 2012 and looks to buy plenty more this year. Another thing to expect is continuation of nice dividends. The forward dividend yield currently stands at 3.6%.  

Pfizer has met or exceeded analyst estimates for the past five quarters. My view is that it should continue to do so. Sales might continue to decline with generic challenges. As long as Pfizer keeps beating expectations, though, the big share gains will keep on coming.

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