The largest pharmaceutical company in the world by revenue, Pfizer (NYSE:PFE), reported its first-quarter earnings results Tuesday morning, and the headline figures weren't as bad as Wall Street had been expecting.
For the quarter, Pfizer delivered $10.86 billion in revenue, a 4% decline from the first quarter of 2014, and an adjusted profit of $0.51 per share, an 11% decline from the year-ago period. Comparatively, Wall Street had been looking for Pfizer to produce just $0.49 in EPS on $10.73 billion in revenue.
Looking ahead, the guidance wasn't nearly as rosy. Previously, Pfizer had forecast full-year revenue of $44.5 billion to $46.5 billion and adjusted EPS in the range of $2 to $2.10. Its updated forecast now calls for $500 million less in revenue on the low and high ends of its full-year sales estimate ($44 billion to $46 billion) and full-year EPS in the range of $1.95 to $2.05.
Analyzing these headline figures won't tell you the full story of what's really going on at Pfizer, though. Here are five things you may have overlooked.
1. Pfizer actually grew revenue on an apples-to-apples basis
Pfizer's sales figures show declines across the board, but operational weakness isn't solely to blame. In fact, foreign currency translation provided a substantial negative headwind in Q1, and it is the sole reason Pfizer lowered its full-year sales and EPS guidance for the remainder of 2015. Because Pfizer derives a good chunk of its revenue from outside the United States, and the U.S. dollar is strengthening, the company is losing a percentage of its foreign revenue when it converts those profits back to U.S. dollars.
Overall, Pfizer's operations grew by 2% on an apples-to-apples basis when currency fluctuations are stripped from the equation. Although 2% is nothing to write home about, it's still impressive when you consider that it grew in spite of a number of ongoing losses of exclusivity on key drugs.
2. Global established pharmaceuticals is still a major drag
If there was any doubt Pfizer's established pharmaceutical business is a mess, Pfizer's Q1 report confirmed it.
For the quarter, its global established pharmaceuticals segment saw revenue decline by 16% inclusive of currency translation, and 10% on an apples-to-apples basis. The big culprit was the Dec. 2014 patent expiration of arthritis medication Celebrex, which saw sales plummet 67% to just $205 million. Additional drags included Zyvox with a 15% decrease in sales, Xalatan with a 14% decline, and Zoloft, whose sales dipped 15% to $86 million.
As a refresher, Pfizer started reporting its results in three segments -- global established pharmaceuticals (GEP), global innovative pharmaceuticals (GIP), and vaccines -- at the beginning of 2014 in order to make it easier for investors to understand how it generates its sales and profits, and perhaps with the intent of spinning off or separating its businesses. While no decision has been made by management on such a move, the continued weakness in the GEP is giving increasing credence to spinning it off -- at least in this investor's opinion.
3. Ibrance's launch is impressive... thus far
One of the big question marks heading into this quarterly report is how successful the launch of metastatic breast cancer drug Ibrance would be. Designed to treat estrogen receptor-positive, HER2-negative metastatic breast cancer, Ibrance nearly doubled progression-free survival in clinical trials to 20.2 months compared to the control group, and it wound up extending overall survival by more than four months compared to the control therapy.
However, Ibrance's cost of $118,200 per year created some concerns (at least on my part) as to how quickly insurers and pharmacy-benefit managers would begin covering the drug. Apparently, there's been little pushback from either side, as Ibrance sales totaled $38 million in just a matter of a month and a half in Q1. Ibrance certainly has multibillion-dollar potential, and a recently released study demonstrating that it also met its primary endpoint in recurring breast cancer implies its sales are primed to take off.
4. Sutent sales plunged by double-digits
On the other side of the coin, cancer drug Sutent, which is approved to treat advanced renal cell carcinoma, gastrointestinal stromal tumors, and pancreatic neuroendocrine tumors, appears to be succumbing to growing competition. Following $1.2 billion in sales in 2013 and $1.17 billion in 2014, Sutent sales plunged 10% to $242 million and are no longer on pace to reach $1 billion in full-year sales.
Here's the bright side: This 10% drop is derived entirely from foreign currency translation. In other words, Sutent sales were flat on an operational basis, meaning a stabilization in the U.S. dollar, or even weakness, could easily return Sutent to blockbuster status.
The downside, though, is that Sutent is facing some serious advanced kidney cancer competition, and it might be time for Pfizer's shareholders to seriously consider writing off Sutent as a growth opportunity in its oncology segment.
5. Pfizer's doing everything it can for investors, but that may not be enough
Lastly, I believe it's worth noting that Pfizer met its previously forecasted share repurchase amount of $6 billion for the entire year, including a $5 billion accelerated share repurchase in February, during this quarter alone. Pfizer has no additional plans to purchase its common stock in 2015.
It's also worth pointing out that even with this accelerated purchase, the company reduced its full-year EPS estimates, as noted above, signaling that share repurchases alone aren't going to be enough to stave off EPS and sales declines brought on by patent losses from its GEP. Put plainly, Pfizer is still on the defensive.
What this investor thinks
Overall, this was a decent quarter for Pfizer, considering the dire results Wall Street had been expecting. Currency weakness and a major reduction in Celebrex revenue was a foregone conclusion. What was a nice surprise was Ibrance's strong launch, as well as 87% sales growth from Xeljanz, and 48% sales growth from its Prevnar family of vaccines.
However, even this growth doesn't change the fact that Pfizer is valued at roughly 17-18 times this year's projected profits, and its operational growth rate is going to be in the low single digits in a best-case scenario. Even looking out a few years, and excluding currency fluctuations, Pfizer isn't expected to deliver substantial top-line growth. Given that, I believe Pfizer is pretty much near its intermediate-term fair valuation and suspect it could be a couple of years before its revenue grows consistently once again.