Pfizer (NYSE:PFE), the largest pharmaceutical company in the world by revenue, is growing more predictable by the day.
The company reported its fourth-quarter earnings results before the opening bell on Tuesday, delivering a 3% decline in sales to $13.12 billion from Q4 2013 and reporting a 4% decline in adjusted profit per share to $0.54. Comparably, though, these results were favorable compared to Wall Street's very timid expectations of $12.9 billion in sales and just $0.53 in EPS for Q4.
For Pfizer, the story was much the same as we've been hearing for the better part of three years: exclusivity losses hampered its growth, yet the company made substantial headway in cost-reductions and in returning cash to shareholders. In fact, Pfizer managed nearly $12 billion in capital returns to investors in the form of share buybacks and dividend payments in 2014, bringing its total capital return to investors since 2011 to nearly $65 billion!
For investors, the report was a non-event, with the stock ending the day little changed. Yet the report also shed light on one thing investors should be seriously concerned with, as well as one negative that they should probably ignore.
One thing investors shouldn't worry about
One clear reason Pfizer's sales and profits have suffered over the past year has been the rising U.S. dollar. Generally, a rising U.S. dollar is good news for Americans, because it means their currency has more "buying power" in foreign markets. For U.S.-based global businesses that derive a decent chunk of their revenue outside of the United States, however, a strong dollar is bad news.
In the latest quarter, Pfizer generated $8.07 billion of its $13.12 billion in revenue in international markets. Because Pfizer reports its results in U.S. dollars, the company has to exchange the foreign currency it receives as payment into U.S. dollars at (in this case) a disadvantageous rate. In fact, excluding currency effects, Pfizer's sales actually rose on an operational basis just fractionally in the fourth quarter.
What I'd suggest investors do is largely ignore these currency-based adverse effects. Yes, they do have an effect on sales and profitability, but they give a false impression of how well or poorly the underlying business is performing.
One thing investors should be concerned about
The one thing investors should actually be concerned about is the ongoing weakness created by patent exclusivity losses. It could be years before revenue lost from the introduction of generic medicines is outweighed by sales growth from innovative new drugs.
For example, Pfizer's forecast for 2015 suggests that it'll experience a negative impact of $3.5 billion from expected product exclusivity losses. Pfizer's cholesterol-fighting drug Lipitor, the former best-selling drug in the world, continues to face generic drug pressure in the U.S., and saw its total sales dip 6% to $572 million in Q4. Similarly, anti-inflammatory blockbuster Celebrex came off patent late in 2014 and saw its revenue in the U.S. tumble 44% to $295 million.
Generic drug introduction usually results in a branded drug losing around 80% or more of its annual revenue within the first two years. Pfizer, which has lost Lipitor, Celebrex, Detrol, and Spiriva in a number of countries, just can't replace these lost dollars with new drugs fast enough to offset the loss from the introduction of generics. It's a serious problem that could keep most investors on the sidelines until a stabilization or reversal of this trend is observed.
Something to be excited about
Despite being a relatively by-the-book earnings report, Pfizer did share one tidbit of information which should have Wall Street and investors excited.
The very first discussion concerning pipeline developments involves HER2-negative breast cancer drug hopeful Ibrance (formerly known as palbociclib) and its upcoming PDUFA decision date on April 13, 2015. Pfizer announced that the Food and Drug Administration informed the company that there was no plan in the works for a review of Ibrance with the Oncologic Drugs Advisory Committee. It was instead in discussions with the FDA regarding labeling of the drug.
Although nothing is a certainty when it comes to the drug approval process, the FDA's waiving of a review prior to the PDUFA date and Pfizer's admission of labeling talks would appear to indicate that Ibrance is going to be approved on or before April 13, 2015.
As a quick reminder, Ibrance nearly doubled progression-free survival for advanced breast cancer patients to 20.2 months from 10.2 months and led to a 4.2 month improvement in median overall survival to 37.5 months. Most people were hoping for a more substantial improvement in median overall survival, but Ibrance nonetheless has the potential to eclipse $3 billion in sales on an annual basis, if not more, if it garners additional indications (as seen in the timetable below).
The smartest thing you can do right now
As an investor, I believe the smartest thing you can do with Pfizer is to stick to the sidelines. In just over three years, Pfizer's nominal share price has gained around 50%, yet its top-line sales have fallen from $67.4 billion in 2011 to a projected $44.5 billion to $46.5 billion in 2015.
Is management doing what it can to control costs and make it worth shareholders' worthwhile to stick around? They're certainty trying, I'll give them that. Pfizer ended 2014 with just 6.37 billion shares outstanding compared to more than 8 billion as of 2010. This better-than-20% reduction in share count has helped buoy EPS in an otherwise unfriendly environment for Big Pharma.
But share buybacks and cost-cutting are no substitute for a lack of organic growth. Until Pfizer is growing its top-line organically there's no real reason to own the stock, especially with an inflated forward P/E of around 15.