Pfizer Inc. (PFE) reported second quarter earnings of 60 cents per share, a penny above the Zacks Consensus Estimate, but 2% below the year-ago earnings. Second quarter revenues declined 1% to $16.9 billion, in line with the Zacks Consensus Estimate. Second quarter 2011 results include the impact of the King acquisition from Jan 31, 2011. Including one-time items, earnings increased 6% to 33 cents.

The Quarter in Detail

Second quarter revenue growth included the impact of the King acquisition, which added $357 million or 2% to the total. While foreign exchange favorably impacted revenues by $740 million or 4%, the US healthcare reform negatively impacted revenues by $158 million or 1%. Generic competition affected revenues by $1.5 billion or 9%.

International revenues increased 5% to $10.3 billion, reflecting 3% operational growth and an 8% favorable foreign exchange impact. Meanwhile, US revenues declined 9% to $6.7 billion.

Biopharmaceutical products delivered second quarter revenues of $14.6 billion, down 3%. All units in the Biopharmaceutical segment posted a decline in sales excluding Emerging Markets (up 7% to $2.4 billion).

The Primary Care unit recorded a 1% decline in revenues mainly due to the loss of exclusivity of Lipitor in Canada and Spain in May and July 2010, respectively, and the loss of exclusivity of Aricept in the US in Nov 2010. Primary Care revenues were impacted by $586 million or 10% due to genericization.

Specialty Care segment reported strong growth of Prevenar in Japan and Developed Europe. However, total sales were negatively impacted by the loss of exclusivity of Vfend and Xalatan in the US in February and March 2011, respectively.

Prevnar 13 sales in the US were also impacted by changes in purchasing patterns for the private market. Generic competition impacted Specialty Care segment revenues by about $181 million in the second quarter of 2011.

Meanwhile, the loss of exclusivity and increased competition for Effexor, Protonix and Zosyn led to a 15% decline in Established Products revenues, which came in at $2.3 billion.

Sales of oncology product Sutent increased 16% to $296 million. Sales of Pfizer’s mega-blockbuster anti-cholesterol medicine Lipitor declined 8% globally to $2.6 billion in the second quarter. While US sales of the drug increased 8% to $1.4 billion, international sales fell 28% to $1.2 billion. The product, which is facing increased competition from cheaper generic rivals, is slated to lose exclusivity in the US later this year.

Generic competition continued to eat into sales of products like Norvasc ($375 million, down 11%) and Effexor ($168 million, down 73%). Wyeth legacy products like the Premarin family and Enbrel posted sales of $255 million and $914 million, respectively.

Both the Animal Health (up 18% to $1.1 billion) and Consumer Healthcare (up 6% to $721 million) segments recorded a growth in revenues. King’s Animal Health products contributed $87 million to revenues. Improving economic conditions and positive currency fluctuations drove Animal Health results.

Growth in the Consumer Healthcare unit was driven by Robitussin and Advil due to a severe cold and flu season in the US. Nutrition revenues grew 4% to $493 million.

Pfizer is currently evaluating strategic alternatives for its Animal Health and Nutrition businesses.

Selling, informational and administrative (SI&A) expenses increased 5% to $4.95 billion during the quarter. Expenses were higher due to the King acquisition and the inclusion of the annual fee under the US healthcare reform from 2011. R&D expenses declined 5% to $2.1 billion primarily due to cost reduction efforts undertaken by the company.

Pfizer remains committed to its cost-containment efforts and should realize cost savings due to the Wyeth integration, workforce reductions, actions taken with the R&D portfolio, as well as savings from a smaller physical footprint.

Pipeline Update

Pfizer, which reduced its R&D guidance earlier this year, expects to present data on several candidates in 2011.

Pfizer filed for US and Japanese approval of crizotinib for ALK-positive non-small cell lung cancer. The company also submitted regulatory applications in the US and EU for axitinib (advanced renal cell carcinoma).  Regulatory filings for other candidates including tofacitinib and Eliquis in both the US and the EU are scheduled to be submitted by the end of the year. A response on Prevnar 13’s (adults) approvability should be out later this year.

Meanwhile, the company is evaluating its business portfolio in order to maximize returns. Pfizer expects to complete this evaluation in the second half of the year. Pfizer struck a deal with Kohlberg Kravis Roberts & Co L.P. (KKR) in April 2011 for the sale of its Capsugel unit.

2011 Guidance Maintained

Pfizer maintained its guidance for 2011. The company expects 2011 earnings in the range of $2.16 – $2.26 per share on revenues of $65.2 – $67.2 billion. While SI&A expenses are expected in the range of $19.2 – $20.2 billion, R&D expenses are expected in the range of $8.0- $8.5 billion. The Zacks Consensus Estimate is towards the higher end of the guidance range at $2.25 per share.

Pfizer also maintained its 2012 earnings guidance. The company expects to earn $2.25 – $2.35 per share on revenues of $62.2 and $64.7 billion. The current Zacks Consensus Estimate is $2.28 per share.

The company expects to spend $6.5 – $7.0 billion on R&D. Pfizer intends to focus on those disease areas which represent higher potential. SI&A spend is expected in the range of $17.5 – $18.5 billion.

Lower R&D spend and share buybacks should help drive earnings. The company repurchased shares worth $2.2 billion during the second quarter of 2011. So far in 2011, the company has spent $4.3 billion on share repurchase. Pfizer expects to spend $5 billion – $7 billion on share repurchases in 2011.

Neutral on Pfizer

We currently have a Neutral recommendation on Pfizer, which carries a Zacks #3 Rank (short-term “Hold” rating). While near-term earnings growth will come in the form of cost cutting and share repurchases, longer-term growth will be dependent on the success of drug development.

Pfizer will face additional challenges later this year with the loss of US exclusivity on Lipitor in November.

 
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