The transition continues at Motley Fool Inside Value pick Pfizer (NYSE:PFE).
The pharmaceutical titan's first-quarter financial report shows that it took some steps to control costs as top-line growth stagnates. But the key question remains whether the company can drive more innovation as it becomes a leaner and meaner operator.
Pfizer reported that revenue for the quarter came in at $12.7 billion, down 3% from the first quarter of 2005. Nonetheless, net income skyrocketed by 126.6% to $4.1 billion, which translated to $0.56 per share. A 7% cut in selling, general, and administrative expenses and a 10% reduction in research and development spending helped drive some of the earnings growth. Much of the improved performance, though, stemmed from a drastic reduction in the provision-for-income-taxes line. That figure declined to $315 million from $2.6 billion in the same period last year.
Still, Pfizer expects to continue to trim the fat. It currently projects that restructuring will generate $2 billion in savings in 2006 and $4 billion in savings by 2008. Cost cutting is important as the firm starts spending more to market new drugs like Exubera, the inhaled treatment for diabetes, and Sutent for kidney and stomach cancers. Earnings aren't expected to grow this year, but if the company can execute on cost cutting, at least they won't shrink.
With growth off the table for now, the pharmaceutical company is doing its best to keep shareholders happy by funneling a chunk of its cash flow into share repurchases. Pfizer bought back $1 billion in stock in the first quarter and is targeting up to $4 billion in repurchases for 2006.
Clearly, Pfizer has plenty of financial resources. Still, it's not as clear that cash is the answer to resolving a key dilemma, namely R&D productivity. According to Ernst & Young's 2006 biotech report Beyond Borders, 2005 marked the third year in a row that the biotech industry brought more new molecular entities to market than the pharmaceutical giants did, despite the fact that biotech spending was just a fraction of what big pharma spent on R&D. Pfizer has filed or expects to file for Food and Drug Administration clearance for five new medicines from 2006 to 2007.
For now, investors can take comfort in the knowing that Pfizer is cutting expenses and giving back to shareholders. But it remains unclear how it will bring more drugs to market and drive top-line growth.
For more on Pfizer, see "Pfizer in Pflux."
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
