Will Tomorrow's Pfizer Earnings Beat the Patent Cliff?

Pfizer (PFE +1.38%) is scheduled to release its quarterly earnings report tomorrow, and like many of its big pharma peers, the drugmaker has suffered a big hit to its business as some of its biggest blockbuster drugs have gone off patent. Yet as the biggest pharmaceutical stock in the Dow Jones Industrials (^DJI +2.85%), the company has plans to restore its former growth glory, and investors hope tomorrow's Pfizer earnings release will reflect early success with its newer drug prospects.

Pfizer was one of the dividend darlings of the Dow until four years ago, when the company slashed its payout in half in order to finance its massive acquisition of Wyeth. Yet since then, Pfizer has boosted its dividend on numerous occasions, and even though the company's payout ratio remains comfortably under 50%, some concerned dividend investors wonder whether the drug giant can sustain its earnings growth in order to provide bigger payouts in the future. 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 quarterly report.

Stats on Pfizer

Source: Yahoo! Finance.

How big a hit will Pfizer earnings take this quarter?
Analysts have pulled back on their views of Pfizer's earnings in recent months, cutting their June-quarter estimates by a nickel per share and reducing their full-year 2013 consensus by more than twice that amount. The stock has taken a mild hit as a result, falling about 2% since late April.

In recent years, Pfizer has had to deal with the loss of revenue from former blockbuster drugs, particularly its cholesterol treatment Lipitor. In its first-quarter results, Pfizer missed expectations with a 9% drop in revenue, and even though the company saw a big jump of more than 50% in its income, the gains largely owed to one-time items. The drugmaker also cut its top- and bottom-line forecasts for the year, sending shares down sharply and putting pressure on the company to develop new drugs.

Pfizer has high expectations for its Xeljanz rheumatoid arthritis drug, which it hopes will eventually challenge AbbVie's (ABBV +2.58%) key Humira offering. Humira makes up half of AbbVie's overall sales, bringing in $4.3 billion in the first quarter alone. If Pfizer can get Xeljanz approved for other conditions, including the psoriasis and psoriatic arthritis indications that it's seeking now in phase 3 trials, then it will pose a much greater threat to Humira, which AbbVie sells to treat seven different autoimmune diseases.

Despite the pressure to boost its pipeline, though, Pfizer has shown some admirable restraint in considering acquisitions. Earlier this month, the company was named as a possible buyer for Onyx Pharmaceuticals (NASDAQ: ONXX), which had received a bid from Amgen that it chose to turn down. Yet Pfizer hasn't jumped into the fray as of yet, choosing not to get into a bidding war that could prove to be extremely expensive just to get the rights on Onyx's cancer-fighting drugs, including the recently approved Kyprolis treatment for multiple myeloma.

Instead, Pfizer has kept focusing on its corporate-reorganization strategy. It completed its spinoff of animal-health unit Zoetis (ZTS +2.53%) this quarter, exchanging its 400 million-share stake in Zoetis for about 405 million shares of Pfizer stock. The move gave shareholders an opportunity to execute a tax-free exchange for Zoetis shares while accomplishing Pfizer's broader strategic goal of completely divesting itself of the animal-health business.

In tomorrow's Pfizer earnings announcement, watch closely to see how well newly approved drugs like Xeljanz can ramp up their sales. Without fast growth, Pfizer could continue to feel pressure from investors growing increasingly worried about where future growth will come from. Moreover, just today the company said that it would split its generic- and branded-drug businesses into two operating segments, potentially setting up another future spinoff.

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