In addition to releasing anemic full-year 2006 sales and earnings growth figures, yesterday Pfizer
Current investors like me take solace in the fact that Pfizer is generating oodles of cash with which to bring new drugs to market and return cash to shareholders in the form of share buybacks and dividend increases. However, I'm also concerned about how Pfizer got itself into its current predicament, explained in its own words as "facing significant challenges ... in a profoundly changing business environment."
I'm even more concerned about the future, because prospective cash flow determines a company's fortunes. Newly appointed CEO Jeffrey Kindler has an opportunity to successfully lead Pfizer down an uncertain path to replace billions of dollars in revenue already lost from patent expirations. He also has three to four years to prepare for the loss of the Lipitor franchise, Pfizer's most successful drug and 26% of total 2006 sales of $48.4 billion.
So what is Pfizer's plan for "future success"? Yesterday's press release had its fair share of generalities, such as maximizing short- and long-term revenues, "actively and more meaningfully" working with clients, as well as "make Pfizer a great place to work." I mean, what company doesn't claim to pursue these types of goals? Fortunately, it provided more specifics on cost-cutting initiatives and plans to lower pre-tax expenses to the tune of $1.5 billion to $2 billion by 2008.
It's also looking to become a more entrepreneurial organization with smaller and more flexible operations. This includes dividing its domestic pharmaceutical business into four units responsible for their own profit and losses. This could help increase accountability and alter Pfizer's reputation for spending billions on research and development with little to show for the efforts.
Quantitatively, Pfizer expects revenue to remain around 2006 levels and for adjusted earnings to grow 6% to 9% for each of 2007 and 2008. It projects operating cash flow of $12.5 billion to $13.5 billion for 2007, or $1.72 to $1.86 per share based on ending 2006 diluted shares. It expects a resumption of sales growth by 2009-2010, when it sees enough new product introductions to move the overall top line in a positive direction.
Fools can head to Pfizer's media room if they're interested in more specifics. Although management has a good handle on sales and profitability trends over the next couple of years, like everybody else, it can't predict how successful its pipeline will be and whether it will lead to successful products in the market. Yesterday's news shows that the company is willing to shake things up, but investors should remain skeptical until tangible benefits occur.
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Pfizer is an Inside Value recommendation. GlaxoSmithKline is an Income Investor selection.
Fool contributor Ryan Fuhrmann is long shares of Pfizer but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.
