Will Pfizer Stand Up to Merck and Johnson & Johnson?

Pfizer (NYSE: PFE  ) will release its quarterly report on Tuesday, and investors hope that the pharma giant will be able to produce a slight gain in profits despite a substantial drop in sales. Now that it has completely divested itself of its stake in animal-health spinoff Zoetis (NYSE: ZTS  ) , Pfizer will have free rein to focus on its core business. But that still won't make Pfizer's job easy in holding off fellow Dow members Merck (NYSE: MRK  ) and Johnson & Johnson (NYSE: JNJ  ) , both of which have equally strong reasons to go after the same lucrative markets that Pfizer has targeted.

Pfizer's sales have suffered all year from the loss of patent protection on Lipitor, its former best-selling cholesterol drug. But Pfizer has a key advantage over Merck and Johnson & Johnson in that Pfizer's pipeline has a huge number of drugs in phase 3 trials, holding the potential for the release of blockbuster candidates in the near future. Will that pipeline lead to huge profits for those willing to gamble on FDA approval? Let's take an early look at what's been happening with Pfizer over the past quarter and what we're likely to see in its report.

Stats on Pfizer

Analyst EPS Estimate

$0.56

Change From Year-Ago EPS

5.7%

Revenue Estimate

$12.70 billion

Change From Year-Ago Revenue

(9.1%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

How will Pfizer earnings fare this quarter?
In recent months, analysts have largely left their views on Pfizer earnings unchanged, raising their third-quarter estimates by a penny per share but cutting their fourth-quarter projections by the same amount, leaving full-year 2013 and 2014 calls unchanged. The stock has done better, climbing 6% since late July.

Pfizer's second-quarter earnings showed many of the same challenges the company still faces, as sales fell 7% largely because of Lipitor's continued tail downward. But painkillers Lyrica and Celebrex produced nice gains to pick up some of the slack from Lipitor's decline, and newer drugs like oncology treatments Inlyta and Xalkori and rheumatoid arthritis drug Xeljanz showed good promise. Those results show true advantages over Merck, which has seen even its top drugs struggle to maintain their revenue recently. Overall, Pfizer managed to beat earnings expectations and sustained its guidance for the full-year.

But the bigger news from late July was in Pfizer's reorganization. The company completed its Zoetis exchange offer in June, leaving it with no remaining stake in the animal-health business. But now, Pfizer expects to break itself into three segments: one for proprietary pharmaceuticals; one for vaccines, oncology, and consumer products; and one for generic drugs and drugs that are approaching patent expirations. By doing so, Pfizer could be setting the stage toward rejecting Johnson & Johnson's approach at keeping all of its health-care-related businesses in a single conglomerate, with many analysts seeing the move as a precursor to formal spinoffs of these divisions in the future.

Still, one of Pfizer's biggest advantages over Johnson & Johnson and Merck is its pipeline, which covers a wide swath of the field and also has numerous candidates at all stages of development. Recently approved treatments like Xeljanz and Eliquis could add up to more than $10 billion in annual sales in time. Overall, Pfizer currently has 76 treatments in its formal pipeline, with potential in the cardiovascular, immunology, neuroscience, and cancer areas, as well as several treatments targeting rare diseases.

In the Pfizer earnings report, watch to see how well the company's various drugs do in keeping sales declines to a minimum. At some point, Lipitor's effect will drop off the income statement, and by then, Pfizer needs to have done a better job than Merck and Johnson & Johnson in getting its established drugs and new prospects to start pushing Pfizer's sales up again.

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