Pfizer Inc. (PFE) reported first quarter earnings of 60 cents per share, a couple of cents above the Zacks Consensus Estimate, and flat from the year-ago period. First quarter revenues declined 0.4% to $16.5 billion, just shy of the Zacks Consensus Estimate of $16.6 billion. First quarter 2011 results include the impact of the King acquisition from Jan 31, 2011.

Including one-time items, earnings increased 12% to 28 cents mainly due to lower costs, a lower tax rate and a lower share count.

The Quarter in Detail

First quarter revenue growth included the impact of the King acquisition, which added $224 million or 1% to the total. While foreign exchange favorably impacted revenues by $97 million or 1%, the US healthcare reform negatively impacted revenues by $166 million or 1%.

International revenues increased 2% to $9.5 billion, reflecting 1% operational growth and a 1% favorable foreign exchange impact. Meanwhile, US revenues declined 3% to $7 billion.

The Biopharmaceutical segment posted first quarter revenues of $14.2 billion, down 2%. All units in the Biopharmaceutical segment posted a decline in sales excluding Emerging Markets (up 10% to $2.2 billion) and Specialty Care (up 12% to $3.9 billion).

The Primary Care unit recorded a 7% 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 $590 million or 10% due to genericization.

Strong growth of the Prevnar franchise, Enbrel and Zyvox, especially in the US and Japan boosted Specialty Care revenues. Meanwhile, the loss of exclusivity and increased competition for Effexor, Protonix and Zosyn/Tazocin led to a 15% decline in Established Products revenues, which came in at $2.4 billion.

Sales of oncology product Sutent increased 7% to $276 million. Sales of Pfizer’s mega-blockbuster anti-cholesterol medicine Lipitor declined 13% globally to $2.4 billion in the first quarter. While US sales of the drug remained flat at $1.3 billion, international sales fell 25% to $1.1 billion. The product, which is facing increased competition from cheaper generic rivals, is slated to lose exclusivity in the US later this year.

Sales of Chantix, an oral nicotinic partial agonist for smoking cessation, increased 5% to $199 million mainly due to strong performance in international markets. US sales, however, declined 11% to $94 million. Chantix has been under pressure over the past few quarters 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 US sales of the drug.

Generic competition continued to eat into sales of products like Norvasc ($356 million, down 3%) and Effexor ($204 million, down 72%). Wyeth legacy products like the Premarin family and Enbrel posted sales of $235 million and $870 million, respectively.

Both the Animal Health (up 16% to $982 million) and the Consumer Healthcare (up 12% to $745 million) segments recorded a growth in revenues. Nutrition revenues grew 3% to $470 million.

Selling, informational and administrative (SI&A) expenses increased 4% to $4.5 billion during the quarter, mainly due to the King acquisition and the inclusion of the annual fee under the US healthcare reform from 2011. R&D expenses declined 8% to $2 billion primarily due to cost reduction efforts undertaken by the company.

Pipeline Update

Pfizer, which reduced its R&D guidance earlier this year, expects to present phase III data on several candidates including tofacitinib (rheumatoid arthritis), axitinib (renal cell carcinoma), Prevnar/Prevenar 13 (prevention of pneumococcal disease in adults) and Eliquis (stroke prevention in patients with atrial fibrillation) in 2011. Pfizer also expects to present phase II data on crizotinib for non-small cell lung cancer.

Pfizer has initiated the submission of a rolling NDA for crizotinib. 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.

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 currently $2.23.

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 Zacks Consensus Estimate is currently $2.27.

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 about $1.4 billion, or 73.5 million shares, during the first quarter of 2011 and about $2.2 billion, or 110.5 million shares, through April 30, 2011. Pfizer expects to spend $5 billion – $7 billion on share repurchases in 2011. This includes the proceeds that Pfizer will receive from the sale of Capsugel.

We currently have a Neutral recommendation on Pfizer, which carries a Zacks #3 Rank (short-term Hold rating). 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.

 
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