Pfizer Inc. (PFE) reported fourth quarter earnings of 49 cents per share, in-line with the Zacks Consensus Estimate and 25% below the year-ago earnings of 65 cents. Full year earnings came in at $2.02, a cent above the Zacks Consensus Estimate, but 17% below the year-ago earnings of $2.42.

Although the company reported higher revenues, results were negatively impacted by increased expenses, primarily due to the addition of the legacy Wyeth operations and increased investment in high-growth and in-line product opportunities, as well as higher net interest expense and an increase in the effective tax rate on adjusted income.

Revenues for the quarter increased 34% to $16.5 billion. Revenues were favorably impacted by 27% due to the Wyeth acquisition (completed in mid-October 2009). Legacy Pfizer products and foreign exchange boosted revenue growth by 3% and 4%, respectively. International revenues increased 28% to $9.1 billion, reflecting 21% operational growth and a 7% favorable foreign exchange impact.

Revenues for 2009 increased 4% to $50 billion. The Wyeth acquisition and legacy Pfizer products boosted growth by 7% and 1%, respectively. However, foreign exchange had an unfavorable impact of 4%. International revenues increased 1% to $28.3 billion, reflecting 8% operational growth and a 7% unfavorable foreign exchange impact.

Following the Wyeth acquisition, Pfizer operates through two segments: Biopharmaceutical and Diversified. The Biopharmaceutical segment posted fourth quarter revenues of $14.6 billion, up 30%. Wyeth products contributed 22% to growth thanks to strong performances by drugs like Premarin, Enbrel, Prevnar and Effexor. The Diversified segment posted fourth-quarter revenues of $1.8 billion, up 83%.

For the full year, the Biopharmaceutical segment posted revenues of $45.4 billion, up 3%. Diversified segment revenues increased 17% to $4.2 billion. Products like Lyrica, Sutent, Vfend ($798 million; up 7%), and Revatio ($450 million; up 34%) helped drive revenue growth in 2009.

Revenue by Major Products

Lyrica, which grew 10% to $2.8 billion, has experienced a very strong ramp since its introduction, and we expect the strong growth to continue with recent label expansions including for the treatment of fibromyalgia. The anti-epileptic market, as well as the market for the treatment of pain associated with diabetes and shingles, have recently become big growth areas for the drug. Oncology product Sutent continues to witness strong uptake with sales coming in at $964 million (up 14%) in 2009.

Meanwhile, sales of Pfizer’s mega-blockbuster anti-cholesterol medicine Lipitor fell 8% globally to $11.4 billion in 2009. U.S. sales of the drug fell 10%. The product, which is facing increased competition from cheaper generic rivals, is slated to lose exclusivity in 2011.

Sales of Chantix, an oral nicotinic partial agonist for smoking cessation, dropped 17% during the year primarily because of safety concerns surrounding it. On July 1, 2009 Pfizer announced that the US Food and Drug Administration (FDA) required it to add a black-box warning to the Chantix label. This is the most severe warning the FDA issues, and is expected to further impact sales of the drug.

Generic competition continued to eat into sales of products like Norvasc ($1.9 billion, down 12%) and Zoloft ($516 million, down 4%).

Expenses

Selling, informational and administrative (SI&A) expenses increased 4% to $14.7 billion in 2009 mainly due to the Wyeth acquisition and increased investment in high-growth and in-line product opportunities.

R&D expenses also increased during the year to $7.7 billion (up 3%) primarily due to the addition of the legacy Wyeth operations, continued investment in the late-stage development portfolio and business-development transactions in the Established Products unit. We expect both SI&A and R&D expenses to increase in 2010.

Guidance

Pfizer’s guidance for 2010 lagged expectations. The company expects earnings in the range of $2.10 – $2.20 on revenues of $67 – $69 billion. This is well below the current Zacks Consensus Estimate of $2.27.

Pfizer also provided long-term guidance and stated that it expects to earn $2.25 – $2.35 per share on revenues of $66.0 – $68.5 billion in 2012. Revenues will decline in 2012 following the genericization of Lipitor. Pfizer shares were down 2.75% in pre-market trading mainly due to the disappointing outlook for 2010.

Pfizer reiterated its goal of realizing synergies of about $4 billion from the Wyeth acquisition. Pfizer has also implemented a cost reduction program that is expected to generate cost savings of about $3 billion.

By adding Wyeth’s lucrative vaccines and animal and consumer products, as well as traditional pills such as the blockbuster antidepressant Effexor, Pfizer is looking to compensate for the loss in revenues that will arise with the loss of exclusivity of Lipitor.

Our Expectations

We currently have a Neutral recommendation on Pfizer. We believe that Wyeth will not provide enough in the form of new products to grow Pfizer’s top-line due to the ever increasing generic competition to key products of both companies. We expect earnings growth to materialize primarily from cost-cutting initiatives and share buybacks in the foreseeable future.
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