Image source: Pfizer.
Late last month, pharmaceutical juggernaut Pfizer (PFE 0.81%) did what it's done best over the past couple of quarters and handily surpassed Wall Street's third-quarter estimates.
Pfizer's headline numbers showed that the drug-developing giant generated $12.09 billion in sales in Q3, a 2% year-over-year decline when factoring in currency movements and other one-time expenses, and an adjusted profit of $0.60 per share, up 5% from the prior-year period. Comparatively, Wall Street had been expecting Pfizer to report $600 million less in sales and EPS of only $0.51. It was easily the biggest "beat" we've witnessed from Pfizer in quite some time.
However, fixating on a company's top- and bottom-line numbers isn't a great idea if you don't first understand how it achieved those numbers, and whether or not growth over the long term is sustainable. Instead, we need to be willing to analyze the finer points discussed during a company's conference call that can give us a much better picture of what the future may hold.
With this in mind, here are five things that Pfizer's management wants you to know about the company that you may have missed by merely skimming its quarterly press release. Quotes are from S&P Capital IQ.
A conservative growth forecast
"If successful, the first potential commercial launch of avelumab is anticipated in 2017, and our goal is to have at least one or more additional launches each year through 2022."
-- Ian Read, CEO
This was perhaps the most defining, and concerning, comment made during Pfizer's conference call. When describing the state of Pfizer's pipeline and noting the promise of the company's cancer immunotherapy compound avelumab, Read offered his projection that the company could introduce roughly one or two novel therapies on an annual basis through 2022.
Image source: Pfizer.
On one hand, the good news here is that new sources of revenue appear to be on the way and Pfizer's mostly past its patent cliff hump. With the exception of blockbuster drug Lyrica, which will lose patent protection in 2018, Pfizer has been benefiting from growth in breast cancer drug Ibrance, blood-thinner Eliquis, and pneumonia vaccine Prevnar 13.
But it's a bit worrisome that Pfizer's vast pipeline entailing dozens upon dozens of ongoing studies may only yield one or two novel therapies per year through 2022. It all but ensures that Pfizer is going to need to purchase pipeline and product portfolio growth to meet or exceed investors' lofty expectations.
Reduce your expectations for Xeljanz
"We will reconsider our investment in the psoriasis indication for Xeljanz following the discussion with the FDA. I would note that a new generation of potential therapies, including oral selected JAK inhibitors and IRAK-4 [ph] are planned to enter phase 2 studies in 2016 for inflammatory bowel disease, atopic dermatitis, and rheumatic diseases."
-- Ian Read
Image source: Pfizer.
In disappointing news, Pfizer received a complete response letter from the Food and Drug Administration in October denying the company an expanded label approval for anti-inflammatory Xeljanz to treat moderate to severe chronic plaque psoriasis. Although Xeljanz is approved to treat moderate to severe rheumatoid arthritis, some on Wall Street have questioned the safety profile of Xeljanz relative to other approved therapies in the anti-inflammatory space and found limited room for Xeljanz to succeed.
Following the CRL receipt, it looked as if Pfizer was planning to do what was necessary to gain approval for Xeljanz as a treatment for plaque psoriasis. During the conference call, though, we witnessed a different tune. With new products in the works for multiple anti-inflammatory indications, Pfizer may be OK with putting Xeljanz's expansion on the back shelf. It remains to be seen if Pfizer continues to invest heavily in Xeljanz, but I believe it's time for investors to de-emphasize the importance of this drug in Pfizer's product portfolio.
Shareholder yield still remains a top priority
"To date, in 2015, we've returned $11.4 billion to shareholders through dividends and share repurchases, and we continue to expect to return approximately $13 billion to shareholders in 2015 through a combination of dividends and share repurchases."
-- Frank D'Amelio, CFO
Pfizer's nowhere near back to consistently strong growth, but that doesn't mean it isn't looking for ways to boost shareholder value. Between 2011 and 2014, Pfizer returned nearly $65 billion to shareholders via dividends and share repurchases. In 2015, it's on pace to deliver in the neighborhood of $13 billion in shareholder returns, including $6 billion in share repurchases, all of which came during the first quarter.
Image source: Pictures of Money via Flickr.
Based on D'Amelio's comments, shareholders can potentially expect Pfizer's dividend to edge higher in the coming years, and for its share buyback program to remain firmly in place. It's possible that a large acquisition could take money away from Pfizer's share buyback program, but I believe the company learned its lesson from the 2009 Wyeth acquisition that reducing dividend payments to shareholders to finance a deal is probably not going to go over well with Wall Street or investors.
Pfizer's M&A strategy, explained
"We feel that if all things are equal on returns, strengthening the innovative part of the company will give a more balanced business between both Established and Innovative, especially in a potential split scenario, if we were to split the company... This management team is not afraid of taking bold steps, and we're looking at opportunities. And when we make our decision as to what is the best way of enhancing value, we will move."
-- Ian Read
Pfizer's management team has made no secret of the fact that M&A is still very much on the table at this point. The question that remains is what that M&A might look like. Previously, Pfizer's management had mentioned that it was mostly "agnostic" toward the size of the deals it would seek, but that it would have to move the needle to interest the company. But aside from this contention, we really haven't been told much about where Pfizer is leaning when it comes to M&A.
Image source: Flickr user thetaxhaven.
Read's comments during the conference call definitely cleared things up a bit. Read noted that an inversion deal that could move Pfizer's headquarters overseas is still on the table. In fact, it was reported just days ago that GlaxoSmithKline spurned possible merger discussions with Pfizer in recent weeks.
But the bigger news is that we received clarification on what Pfizer's seeking out: pipeline potential and early stage growth rather than mature drug growth. Read would really like to see Pfizer expand its innovative offerings, and that's unlikely to happen if it takes on a company the size of GlaxoSmithKline. While it's too early to speculate on specific companies (even with Pfizer turning its attention to Allergan), I'd expect Pfizer to hone in on drug developers in the $5 billion to $50 billion market cap range.
Growth for Pfizer's lead vaccine may slow, but there's still plenty of promise
"For 2016, we continue to believe that the catch-up opportunity [for Prevnar 13] will still be robust, although [it] may not grow versus 2015."
-- Albert Bourla, group president of the Vaccines, Oncology, and Consumer Healthcare business
Sales of Prevnar 13, Pfizer's vaccine to prevent pneumonia, have catapulted higher over the past year following a recommendation from the Centers for Disease Control and Prevention that all adults 65 and up, children younger than 5 years old, and people ages 6 and up with select risk factors, get the vaccine. Of the 45 million eligible adults, Pfizer estimates that it's reached about 25% to 30%.
Image source: GlaxoSmithKline.
However, Pfizer wants its shareholders to understand that Prevnar won't be able to keep up its torrid growth pace beyond 2015 -- although it's not done growing, either. Bourla believes that many of the adults already on Prevnar had previously taken Pneumovax, the prior-generation recommended product. Thus, convincing these individuals to take Prevnar 13 wasn't exactly difficult. The big challenge is how to get the remaining unvaccinated individuals into the fold. While Pfizer believes it has ample opportunities to reach this group and boost sales, growth for its best-selling therapy beyond 2015 will probably be considerably tamer.
Is Pfizer a buy?
With a better idea of what Pfizer's M&A future looks like, and some color commentary on its best-selling vaccine, shareholder return plans, and drug development projections, we can now generate a pretty decent assessment of Pfizer's long-term outlook.
I believe if you take a long-term approach to investing in Pfizer (think 10 years and beyond), then you should be in pretty good shape relative to the overall market. Pfizer's superior dividend and share buybacks should provide some buffer to protect against the inevitable hiccups that the market experiences from time to time.
However, compared with its peers, Pfizer is still nothing more than a middle-of-the-pack option in my book. Ibrance and Eliquis are go-to growth stories for the time being, and avelumab certainly has the room to become a blockbuster cancer immunotherapy drug. But eroding sales in Pfizer's mature drug portfolio and a conservative drug development outlook through 2022 may entice investors with a higher appetite for risk and growth (especially in a bull market) to look elsewhere.
