The leading research-based biopharmaceutical giant Pfizer Inc. (PFE, Financial) announced its fourth-quarter and full-year 2014 earnings result on January 27, 2015. While the CEO, Mr. Ian Read tried to shift the focus of investors by emphasizing on Pfizer’s need to create “a sustainable high-value pipeline.” It is beyond doubt that the company is sitting on a huge pile of cash. As this report highlights, Pfizer is looking to beef up its early stage pipeline by acquiring near-market assets than getting involved in the long-term projects.
Decoding the results
The fourth quarter witnessed a slide in Pfizer’s top line by 3% from $13.56 billion in Q4 2013 to $13.2 billion during the reported period. As a result, a drastic decline of 52 percent was observed in the net income for the period to about $1.23 billion along with a 51% ebb in its diluted EPS to $0.19. To add to that, even the lateral comparison of FY 2014 with FY 2013 reflected a 4% revenue decline from $51.6 billion to $49.6 billion. Consequently, the net income declined by 58% from about $22 billion to $9.1 billion, and there was a straight 55% drop in the diluted EPS of $3.19 to $1.42. Such a steep diminution in revenue and other fundamentals was contributed by a number of varied factors.
In the reported quarter, the recurring threat was posed by the worsening generic competition- attributed by the expiration of Pfizer’s patents, enabling easy production of generic versions of its drugs. For example, after being the world’s top selling drug for almost a decade, the cholesterol-lowering drug Lipitor lost considerable market share, with Pfizer struggling for its market exclusivity since 2011. Some other components of this exclusivity-struggle race were drugs like the painkiller Celebrex, the arthritis-drug Enbrel and also the bronchitis medicine Sprivia, to name a few. Overall Pfizer reported that the patent-loss cost it a whopping $3 billion to $4 billion an year.
Another major blow that significantly contributed to Pfizer’s poor performance was “pricing pressure.” Not just Pfizer, but most of the world’s biggest drug makers had to face the heavy blow of the aggressive tactics of insurers (both private and public) to extract steep price discounts even for the newest medications. On top of this frenzy, the company also had to face unfavorable currency exchange rates, owing to the weak global economy, which cut Pfizer’s revenue by two percentage points.
Apart from the abovementioned items, the visibly expanding R&D investment was also an important factor contributing to a radical income fall. Pfizer’s biopharmaceutical businesses- namely Global Innovative Pharmaceutical, Global Vaccines, Oncology and Consumer Healthcare and Global Established Pharmaceutical have all observed an increment in their R&D expenditures by 25%, 17% and 5% respectively this quarter.
The mitigation
Pfizer’s mitigation processes have been in place for a long time now. As a result of increased costs and decreased revenues, the company instantly looked to its frequent strategy of forming big alliances to boost revenue and cut costs at 10 x speeds. However, his $119 billion offer for Britain's AstraZeneca PLC was rejected last May. The deal would have moved Pfizer's headquarters to Britain and reduced the company's corporate tax rate. More recently, Bloomberg reported that Pfizer had approached Teva Pharmaceutical Industries, Ltd., about buying the Israel-based drug maker but was rebuffed –Â contrary to expectations.
In an order to normalize the aftermath of Pfizer’s falling sales and the pressure of coming up with optimal solution to its patent-expiry problem, the company announced a partnership with Germany’s Merck KGaA in November, boosting its foothold in oncology by giving it rights to an experimental drug that’s part of an emerging class of cancer therapies.
Furthermore, research head Mikael Dolsten said that Pfizer also could get six other brand-new drugs approved in the next four years — including ones for severe pain, Type 2 diabetes, severe cholesterol problems, a type of leukemia and two rare diseases. Eight drugs could also win approvals for additional uses. Meanwhile, the company also reported that it expected about $2 billion in additional revenue from its newest drugs, including blood thinner Eliquis, cancer drugs Xalkori and Inlyta, new meningococcal group B vaccine Trumenba and its pneumonia vaccine Prevnar 13, now recommended for adults. (For the entire transcript click here)
Final words
Irrespective of the headwinds, Pfizer has tried to keep its primary focus on creating shareholder value and has returned nearly $12 billion to shareholders through buybacks and dividends in 2014. In addition to that, it plans to increase that amount to almost $13 billion in the coming year.
The above graph shows the daily-price movement and volume of PFE. (Sourced from company’s IR website)
The stock at present trades at 22.46 times its earnings and has a market cap of $200.55 billion. In an industry with the likes of Merck & Co. Inc. (MRK, Financial), Novartis AG (NVS, Financial) and Sanofi (SNY, Financial), Pfizer’s revenues have remained consistent in spite of the heavy competitive pressure. The above graph is clearly indicative of the moderate price volatility in the stock and the decreasing volume over time. In the backdrop of such a scenario it would be interesting to see where Pfizer’s earnings head to in the foreseeable future. Investors must hold the stock for the time being and watch out for Pfizer’s activity in the M&A space.
