Times are challenging for Pfizer (NYSE:PFE), the largest pharmaceutical company in the world by revenue.
In its latest quarterly report, Pfizer delivered a 3% decline in revenue to $13.12 billion as foreign currency translation headwinds and patent exclusivity losses continued to weigh on the company. Adjusted profits fell as well, for many of the same reasons.
But just because Pfizer's headline figures failed to impress Wall Street doesn't mean we have a really good understanding of the business, at least not from a few short paragraphs in an earnings report. In order to really understand the inner workings of Pfizer, we need to dig deep into management's commentary during its conference call to discover what important nuggets of information it really wants investors to know.
Here are the five most important things I'd suggest Pfizer's management wants you and investors to know, quotes courtesy of S&P Capital IQ.
We still have an impressive pipeline
"This [86 programs in clinical development] is good progress and over the course of the next four years we expect to have more than 20 Phase 2 and Phase 3 registration starts and hope to have more than 15 potential approvals, many of them new molecular entities." -- Ian Read, Chief Executive Officer
Pfizer may be struggling mightily with the loss of blockbusters to generic competition, but it's worth noting that the company still has 86 clinical and registration compounds in development. Obviously they might not all succeed, but that's a lot of chances for Pfizer to "hit one out of the park," so to speak.
Specifically, CEO Ian Read is looking for somewhere in the neighborhood of 15 approvals between 2015 and the end of 2018. This is pretty much on par with the 16 approvals Pfizer delivered between 2011 and 2014. More importantly, with many being new chemical entities, these approvals should give Pfizer the opportunity to feel out new label indications to potentially diversify its revenue stream, as well as protect these innovative new compounds from competitors.
Pfizer did get a boost this week with the expected approval of Ibrance as a treatment for estrogen-positive, HER2-negative first-line metastatic breast cancer, but it'll need a lot more than that in order to hit Read's lofty goal of 15 approvals through 2018.
We can't counteract exclusivity losses fast enough
"This year and for the next couple of years ongoing expense reductions will result from continuous improvement efforts. However given that the largest opportunities have already been realized, the amount of potential reductions is more limited." -- Ian Read
Read noted during Pfizer's Q4 conference call that the company has reduced operating expenses by $5.5 billion over the past four years. However, as Read's words echo here, many of the big opportunities to shave off expenses have already been employed. In other words, no matter what Pfizer does to control costs over the next couple of years, it will not be enough to counteract the loss of exclusivity on key drugs like anti-inflammatory Celebrex, cholesterol-fighter Lipitor, and overactive bladder drug Detrol, to name a few.
For shareholders it's a wakeup call that Pfizer's EPS, even with substantial share buybacks, is likely to fall. After a nearly 50% increase in its share price over the last four years, this makes Pfizer's forward P/E of 15 appear a bit pricey.
We hope you like share buybacks!
"From 2011 through 2014 we returned more than 64 billion to shareholders through dividends and share repurchases. In addition in 2015 we anticipate returning approximately $13 billion to shareholders through dividends and share repurchases." -- Frank D'Amelio, Chief Financial Officer
Just because Pfizer is losing exclusivity on some of its best-selling drugs doesn't mean it's losing its focus on how to improve shareholder value. Since 2011 Pfizer has returned in excess of $64 billion between share buybacks and dividend payments, with another $13 billion anticipated in 2015.
While somewhat good for investors, I view this cash usage as another ploy to mask Pfizer's lack of growth. Pfizer's dividend growth has been tame for the better part of a decade when you consider that the company halved its payout to pay for the Wyeth buyout in 2009. What this shareholder return is really all about is a way to reduce its shares outstanding through buybacks and artificially boost its EPS despite an expected decline in actual sales and net income.
We have to do something with all this cash!
"I don't feel that we need to do a large deal. I do believe though that we can deploy capital in a way that it can improve return to shareholders." -- Ian Read
When asked about his company's business development strategy, Read took a very different approach than in previous conference calls by diverting away from the focus on a big deal. But, to be clear, Read expects to find ways to improve shareholder value with that cash -- and share buybacks can't do it alone!
What could be holding Pfizer back? While no specific mention was made of any sectors, it was noted during the conference call that many sectors' valuations are inflated. Pfizer may just be biding its time until biotech and/or pharma valuations cool off a bit.
Additionally, we could see Pfizer take a similar approach to Merck where it aims for so-called "bolt-on transactions." These small and midsized buyouts could allow Pfizer to quickly add new products to its portfolio, boosting its bottom line quickly and pleasing investors. I suspect one of the key takeaways here is that Pfizer is still very much on the prowl for acquisitions.
We're taking the path less traveled with cancer immunotherapies
"You asked for some examples of that [how we'll be among the first three to launch immuno-oncology products in new tumor types]; the examples would be ovarian or gastric for example. And this is where we're going to see to put our emphasis rather than on indications that are more crowded as melanoma, for example." -- Albert Bourla, Group President of Vaccines, Oncology, and Consumer Healthcare
Perhaps the most exciting thing we learned from Pfizer's conference call is exactly where it plans to focus its attention when it comes to cancer immunotherapies.
If you recall, Merck and Bristol-Myers Squibb developed their immuno-oncology products initially to fight metastatic melanoma. However, this potentially deadly form of skin cancer has a lot of competition considering a handful of recent approvals. Instead of joining a long list of approved products for advanced melanoma, Pfizer plans to bypass the indication altogether and go after new solid tumor indications. Specifically, as Albert Bourla notes, Pfizer will target ovarian cancer and gastric cancer.
Gastric cancer is a particularly difficult cancer to treat, with the market value of prescriptions to treat this form of cancer expected to more than triple to $3.8 billion by 2023 from $1.1 billion in 2013. By a similar token, in 2022 ovarian cancer could be a $1.6 billion market, more than double what it was in 2013. On top of the financial benefits these therapies could provide to Pfizer's results, these are two unmet cancer indications where patients need drugs that'll improve their quality of life.
While I'm encouraged by the baby steps Pfizer is making in cost controls and product development, I can't overlook how weak its results would be without billions in annual share buybacks. Until Pfizer's organic growth stops sinking because of exclusivity losses, I see few reasons to actually own this stock.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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