Big pharma giant Pfizer (PFE 0.46%) reported its second quarter earnings results two weeks ago, reminding shareholders that the patent cliff is very real, and that its operations are going through a sizable shift.
For the quarter, Pfizer reported that revenue slipped 2%, or $200 million, to $12.77 billion. Profits were also a mixed tale with Pfizer's adjusted income dipping 6% and its adjusted EPS rising 4%. The company also lowered its full-year revenue guidance due to generic competition entering the market against Celebrex.
Pfizer investor presentation, Source: Pfizer.
However, Pfizer's earnings report only scratches the surface of what's going on at the world's largest pharmaceutical company.
That's why today we're going to take a closer look at the five most important quotes from Pfizer's conference call, courtesy of S&P Capital IQ, in order to get a better understanding of where the company is headed next.
Buybacks are here to stay
"To date in 2014, we've repurchased $2.9 billion or approximately 95.1 million shares, and we continue to expect to repurchase 5 billion of our common stock this year." – Frank D'Amelio, CFO
Source: Steven Depolo, Flickr.
With Pfizer's top-line growth stymied by the loss of exclusivity on key drugs it's turning to incentives for shareholders, including stock buybacks. According to Frank D'Amelio, Pfizer has returned $53 billion to shareholders from 2011-2013, which equates to almost 30% of its current market cap!
Share buybacks do have the positive effect of reducing the number of shares outstanding, which can in turn boost EPS if income remains constant. The idea here is that rising EPS could make Pfizer appear inexpensive relative to its peers and boost its share price, benefiting shareholders.
Of course, investors would be wise to pay more attention to the company's apples-to-apples net income figure rather than its EPS since share buybacks can also mask stagnant growth as we saw during the second quarter.
Palbociclib could become a big catalyst
"We achieved several key R&D milestones, including the initiation for rolling submission in June 2014 of an NDA seeking approval for palbociclib, which we expect to complete this August." – Frank D'Amelio
Pfizer's management team had a lot to say about the company's developing pipeline, but no drug stands out as a larger potential game-changer for the company than first-line ER-positive, HER2-negative breast cancer drug hopeful palbociclib.
As a breakthrough therapy designated drug, palbociclib met its primary endpoint in the midstage PALOMA-1 study and delivered progression-free survival of 20.2 months compared to just 10.2 months for the control arm. This accelerated new drug application acceptance by the Food and Drug Administration is a potentially key near-term catalyst which could add some pop to Pfizer's sales beginning in 2015. Peak annual sales estimates for palbociclib range wildly between $2 billion and $5 billion, and it remains a key cornerstone, in my opinion, of Pfizer's oncology portfolio.
M&A: It's not a matter of if, but when
"We look and continue to look at a very wide spectrum of M&A transactions. We have substantial financial ability and balance sheet, and tax inversion is one part of the value equation." – Ian Read, Chairman and CEO
If there was a prevailing theme during Pfizer's conference call and its Q&A session afterwards, it revolved around the possibility of Pfizer breaking up its business or pursuing additional acquisitions.
Pfizer has essentially come to terms with the idea that it needs to buy growth in addition to its existing pipeline products. Although Read noted that Plan A still remains the company's internal pipeline, Read's made it obvious that acquisitions, including those which could result in a corporate tax inversion that sees Pfizer moving its corporate headquarters overseas, remain a viable possibility. Investors should certainly keep their eyes and ears open as Pfizer still has an appetite for deals.
Emerging markets are vital to Pfizer's growth
"I think we're obviously very pleased with the performance of China this quarter. Overall, the total biopharmaceutical business in China showed operational growth of 27%.... We're very focused on driving the legacy brands in China, Lipitor is probably a standout product for us. And we see a great fit with the priorities of the Chinese government to really better treat and manage patients with cardiovascular disease, and our portfolio of Lipitor and Norvasc is a great fit in that regard." – Frank D'Amelio
Though business development activity and the development of new compounds took center stage, I believe a long-lost "hero," so to speak, of Pfizer's quarterly results was its strong emerging markets growth.
For the quarter, emerging market revenue rose 11% operationally, although it's not a big enough component of Pfizer's total sales to make a huge impact... yet! The big overseas growth driver which is going to be a critical component to Pfizer's success in the second half of this decade is China. As Frank D'Amelio noted above, China delivered incredible growth; and it did so with legacy brands that Pfizer understands how to market backwards and forwards. Lipitor, for example, saw sales in China rise 55% operationally quarter-over-quarter. We'll want to watch China and other emerging markets growth very carefully moving forward, as this could be a key opportunity for Pfizer.
Don't overlook these stealthy generic drugs
"Essentially, we have five monoclonals in development. All of those products we expect to come to market in the 2017-2018 time frame, after the loss of exclusivity of the basic patterns of those molecules." – John Young, President of Established Pharma
Source: Alberta Innovation and Advancd Education, Flickr.
Finally, if you can't beat them, join them! Pfizer's long been a stronghold of big pharma innovation, but even it's succumbing to the allure of generic drugs.
Generic drugs have lower margins than branded drugs, and can sometimes even have a fiercer competition. However, generics are also cheaper than branded drugs, and thus hold a strong draw for physicians and consumers when it comes to being prescribed. In 2012 alone generic drugs saved the U.S. healthcare system a whopping $217 billion. In other words, generics aren't going to single-handedly save Pfizer's business. However, generic drugs do offer Pfizer a nice buffer against ongoing loss of exclusivity in key drugs.
In addition to its recent purchase of InnoPharma whose current generic portfolio consists of 10 FDA-approved products, John Young notes above that Pfizer has a number of high-profile generic drugs in the works that should be ready to hit pharmacy shelves in the latter half of this decade. Don't be shocked if you see other big pharma companies taking a similar route and beefing up their generic drug segments in the coming years.
