The Street almost seems to be processing the quarterly reports from Big Pharma companies like Bristol-Myers Squibb and Pfizer (NYSE:PFE) as annoying opening acts that just have to be tolerated before the headliner goes on stage. With that in mind, Pfizer's decent fourth quarter results aren't likely to matter as much as upcoming clinical trial results from studies of palbociclib ("palbo"), Prevnar, and Xeljanz that could collectively point the way toward over $10 billion in long-term revenue.
Not a lot expected, slightly more delivered
Pfizer reported that revenue fell 3% as reported this quarter, good enough to beat the average Wall Street guess by about 1%. Although the company's emerging market revenue growth was a bright spot (up 9% to about $2.7 billion) and products like Lyrica (up 11%), Prevnar (up 3%), and Enbrel (up 5%) did a little better than expected, there just aren't enough large new drugs to move the needle all that much. Consumer health was up 1%, missing estimates and continuing an uninspiring trend.
Margin performance was likewise so-so. Gross margin was a little better than expected, but still down a half-point. Operating income was on target, but down 3% from last year.
All told, it's difficult to get excited about Pfizer's current performance. This slowdown has long been expected, but the fact remains that Pfizer is well behind Bristol-Myers Squibb (revenue up 6%) and Johnson & Johnson (NYSE: JNJ) (up 12%) when it comes to sales growth. Pfizer still has excellent margins by industry standards (an operating margin 10 points higher than Bristol-Myers, and well ahead of others like Lilly and Novartis), but the problem is that Wall Street never seems to reward maintaining excellence as much as attaining it.
Data on the way
If current results don't give investors all that much to cheer or pay attention to, the same cannot be said of upcoming clinical data releases. Over the next few months Pfizer is expected to report Phase II data on palbociclib in breast cancer, Phase III data on Xeljanz in psoriasis, Phase II data on the company's PCSK9 cholesterol drug (likely at the March ACC meeting), and data from the company's CAPITA study of the Prevnar vaccine.
Palbociclib may or may not be the most valuable asset in the company's pipeline (clinical data will decide that), but it is certainly the one for which the expectations are highest. The pharma industry has been working on CDK inhibitors for two decades, and this one may finally be the real deal. While the primary indication is breast cancer, Pfizer will be exploring the efficacy of the drug in other cancer types and many analysts have already penciled this one in as a $5 billion drug in 2020. With Pfizer's position in the evolving immuno-oncology market not as strong at present as that of Bristol-Myers, and perhaps Novartis, strong results are important to the share price.
Palbociclib is the headliner, but these other drugs are not trivial add-ins. Xeljanz is addressing a market that is worth billions and, while it may never beat out biologics, success in psoriasis would help it on its why to the $2 billion or more in sales that many already expect.
OTC Lipitor and a split are further off
I've written previously that I do not see a lot of automatic inherent value in Pfizer's decision to split the company into three different operations (one "value", two "innovative"). Were the split to lead to the acquisition of the value segment by a company like Mylan or Valeant, that could be a different story. Mylan's strong manufacturing base and existing relationship with Pfizer could make such a deal worthwhile, and Valeant could leverage its low tax base to generate value from a deal and advance its plans to become a big pharma, though a mature, developed-market focused business is not really what they seem to want these days.
Last and not least is the possibility of over-the-counter (OTC) Lipitor. Pfizer is running a 1,200-patient Phase III study of the lowest dose form of Lipitor (10 mg) and could file with the FDA to sell it as an OTC drug in 2015. The FDA is likely to be sensitive to the risk of such a move, and I'm not sure about the economic argument of selling a drug OTC for $30 or $40/month when the co-pay for the generic version is often less than $10. However, stranger things have happened.
The bottom line
I don't hate Pfizer at this price, but neither do I have any particular love for it. While I do believe that drugs like palbo, Prevnar (a vaccine), and Xeljanz can all contribute to more than $10 billion in pipeline-based sales in 2020, I'm only looking for long-term revenue growth of about 1% as these new/growing drugs offset older drugs lost to generic competition. I do expect free cash flow growth to exceed sales growth, but that only gets me to $32 in fair value in my model.
Including Pfizer's dividend, that's good enough for an annual expected return in-line or slightly better than the overall market. That makes Pfizer a decent enough hold, but perhaps not the most compelling idea for new money.