Analyzing Pfizer (PFE)

By Yaser Anwar, CSC of Equity Investment Ideas

PFE recently announced that it will cut 20% of the US sales force which I believe is a positive for Pfizer. It indicates that Pfizer is serious about lowering the cost base.

Investors should expect Pfizer to save $440 mil in 2007, about $0.04-$0.05 per share after tax. This represents 2% of The Street’s 2006 EPS estimate of $2.05. Pfizer does not plan to reinvest the funds. The SG&A will decline by 4% in 2007 (from $15.3B in 2006E to $14.7B in 2007E).

There are five reasons this move by PFE makes sense

1) Zoloft’s patent expired in June 06

2) Pfizer abandoned indiplon after FDA didn’t approve the drug in May

3) The Exubera launch has been disappointing so far

4) Norvasc’s patent expires in September 2007

5) Zyrtec’s patent expires in December 2007.

• The street believes that managed care is likely to continue to encourage use of branded Norvasc and Zyrtec in 2007 given that they are set to go generic in late 2007.

• The risk associated with a cut of this magnitude is that a reduction in physician visits negatively impacts Pfizer’s top line. Pfizer management admitted that as it transforms its field force there might be some temporary dislocation. However management assured shareholders that programs are in place to smooth the transition, and Pfizer is not projecting a major fall-off in sales.
• Management has said that it will take steps to evaluate additional cost reduction opportunities, but "Europe is in a different place." Management also stated that additional cost efficiency initiatives will be discussed in January 2007 at a separate analyst meeting to discuss the company’s long-term outlook.
• In July 2006, PFE projected cash flow of $34 billion taking into consideration capital expenditures and dividends over the next 30 months, derived from continuing operations coupled with net proceeds of $13.5 billion from the sale of the consumer products division. About $17 billion of the cash flow is slated for acquisitions, and $17 billion for common share buybacks.
• I believe Pfizer’s size gives it important competitive advantages over peers, especially in terms of marketing prowess in managed care and Medicare markets. PFE has recently upped its guidance too. Pfizer said it now expects 2006 earnings of "at least" $2.05 per share. The company’s previous guidance was for EPS $2.00 alongside the current consensus earnings estimate is $2.03 per share for the year.
• PFE said it expects 2007 earnings growth to be in the high single digits, suggesting earnings above the consensus estimate of EPS $2.15.

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