Pfizer Looks Like a Bond Replacement – Earnings Preview (PFE)

Pfizer (PFE) reports on Friday, and just liketearing off a band-aid, investors are hoping the earnings release tobe quick, and relatively painless.  Nobody’s expecting anythingspectacular on the “good news” front, while many issues both shortand long term swirl around the company like vultures (or maybe that’sjust the generics).   Just to get things framed,let’s start with the boilerplates:

1^st quarter estimates are $0.57 EPS and revenues of $11.9 billion; estimates forthe second quarter call for earnings to be down sequentially, with $0.54expected.  Going out a little further,revenue growth is supposed to be essentially flat for both 2007 and2008, after which it becomes anybody’s guess.   

The company suffered a majorsetback when promising HDL drug torcetrapib was shut down in the middleof clinical trials; some estimates on this one had it selling $4-5 billionannually in the U.S. alone.  While it won’t affect estimatesfor this year and next, it puts a huge hole in the middle of Pfizer’slineup.  Torcetrapib was supposed to be a combo drug that utilizedtop seller Lipitor, which is already coming down from peak sales levels. 

Lipitor made up more than 25%of revenues in 2006, but is expected to only sell through $1.9 billiondomesticaly in the 1^st quarter, down 4% year-over-year. Worldwide revenues should still eke out a small gain thanks to overseasgrowth and a 5% price hike back in January.  The U.S. market forLipitor is expected to die slowly from here, with Merck’s competing Vytorin expected to grow 60% in the past quarter.  We gave a previewof Merck’s earningshere. 

While Lipitor’s main patentis good until 2010, pending patent losses at PFE figure to be a realrevenue dampener for the remainder of year; the most notable being Norvasc,a $4.9 billion seller worldwide in 2006.  Only Mylan’s (MYL) product is out for the next six months,but then of course there will be a swath and sales levels will finishtheir plummet.  Antidepressant Zoloft and antibioticZithromax both lost exclusivity in 2006, and allergy medicine Zyrtecis coming off later this year.

After looking through themost recent annual report, it is difficult to see Pfizer having the capacityto fill all those billions in decelerating sales.  While the companyhas a few $1 billion drugs that are growing, they have no (again, notone) drugs with sales over $2 billion annually that are still on theupswing.

When looking over the near-termoptions, there is a large open interest (but quiet trading) in the April$25 PUTS (that also expire on Friday); these could see large trading volumes if the company makes any real guidance changes on Friday.  It will be curious to see what kind of downsidethis stock actually has in the coming months, as the 4.30% yield aloneis a solid backstop. 

In addition, valuation willstill be in the low teens barring a cataclysmic event, as the companycurrently trades for less than 11x trailing earnings and has dozensof drugs in the upper testing stages.  We may be calling Pfizerthe first Pharma REIT in a few quarters, as the $22 to $25 price rangemay be a relative floor but growth will be secondary to “asset management”of the drugs. It is also still a wildcard as to what the company will do with its billions of dollars added on from the sale of its consumer products unit to Johnson & Johnson (JNJ) 

Ryan Barnes
April 18, 2007

Ryan Barnes can be reachedat [email protected]; he does not own securities in thecompanies he covers.