- The performance of Ibrance will be crucial. Can robust revenue growth continue?
- Lyrica & Viagra sales need to remain strong in order to keep the company's sales stable while its blockbuster drugs catch up.
- Pfizer has taken on a sizeable amount of debt this year, so income investors should be watchful about dividend coverage.
Pfizer (NYSE:PFE) announces its third-quarter earnings on the 1st of November. Analysts are expecting earnings per share of $0.61 on revenues of just over $13 billion. Both revenue and earnings estimates are higher than the same period in 2015. Revenues appear to be growing faster, which is understandable, as the company has made multiple acquisitions in recent times. This means margins will be in the spotlight in the third quarter. Pfizer's operating margin on a 12-month trailing basis has fallen to 24.6%, from a much more robust level back in 2013, when the same metric was almost at 30%.
The stock is basically trading flat for the year although it did reach the $37.30 level just before it announced its second-quarter numbers. However, the Prevnar family of vaccines really disappointed in the second quarter and the stock sold off as a result. Prevnar vaccines almost brought in $1.6 billion in revenues in the third quarter of 2015. The recent FDA approval for Prevnar 13 should help sales rebound here and it will be needed as this family of vaccines is the company's biggest earner.
Clinton's Policy Would Only Affect Companies With Generic Drugs
I think it's fair to say that many big pharmaceutical companies including Pfizer have suffered in recent months due to Hillary Clinton's posturing over excessive drug prices. Firstly, if she is elected, getting her plan through the Congress would be no easy task. Secondly, I feel innovation is justly rewarded in this sector as the fees are huge in developing drugs through clinical trials. Therefore, since Pfizer's pipeline looks strong I don't see the stock being adversely affected permanently.
Can Ibrance Keep Charging Forward?
Pfizer's cancer drug ibrance was a standout performer in the second quarter. In fact, ibrance grew its second-quarter sales to $514 million, which was almost a 300% increase over the corresponding quarter last year. Novartis and Eli Lilly provide strong competition in this area, so investors will be tuning in to see if ibrance can sustain the strong revenue growth it achieved due to obtaining the first-mover advantage in this lucrative area. Furthermore, because of the Drug's success to date in breast cancer treatment, Pfizer has also been busy trying to get it approved for other cancer treatments. Remember ibrance is in its early growth phase so investors will be expecting strong sustained top-line growth.
Can Xtandi Justify The Acquisition Price of Medivation?
Furthermore, Pfizer now also has at its disposal another top-selling cancer drug, Xtandi, which has come from the recent Medivation acquisition. Investors will be closely watching results of Pfizer's oncology division, but more importantly, they will be looking at the forward guidance. Now with Ibrance and Xtandi, Pfizer has significant offerings for the most common female and male cancers in the world today. Ibrance isn't even approved in Europe yet, so guidance here has the potential to move the stock despite oncology revenues at present making up less than 20% of company's turnover.
Lyrica & Viagra Sales Need To Keep The Wheels Turning
However, the main focus of the earnings announcement will be to see if Pfizer has enough in its pipeline to offset the decline that is going to come from the likes of Viagra in 2017 and Lyrica in 2019. Lyrica's US Patent is expiring in 2019 (and is coming under pressure in the UK) & Viagra is coming off patent in 2017. The market will be looking for stability in these drugs as both Lyrica and Viagra make up lion's share of Pfizer's biggest revenue division which is Internal Medicine. Lyrica crossed over $1 billion in revenues last quarter and Viagra brought in $401 million. These drugs need to keep performing well in order to give time for Pfizer's faster growing drugs to catch up.
Capital Return Strategy Will Take Center Stage
From a dividends point of view the stock is currently paying out a yield of 3.69%. In saying this though, the company's debt has spiked to almost $45 billion as a result of the heavy investment the company has done this year alone. In the first six months alone the company's net income of $6.95 billion has exactly equaled what has been paid out in dividends thus far this year. Now the company isn't expected to raise its dividend until next year but the present payout ratio is unsustainable.
It will be interesting to see how management words how it will reward shareholders over the next 12 months. Pfizer undoubtedly has a very impressive pipeline with over 90 studies that are currently ongoing. However it has paid for it and the balance sheet has taken a hit. Pfizer has already proved that it will put company investment ahead of rewarding shareholders. Remember when it cut the dividend back in 2009 the share price dropped to $12. This is what shareholders will be wary of and will look for some assurance here.
Pfizer is a company that is valued on the growth of its blockbuster drugs along with the steadiness of its drugs that are outside patent protection. Revenue and earnings growth have already been baked into the stock. For Pfizer to head back towards $40 a share, we need to see the likes of Bococizumab & ertugliflozin proving themselves. These types of the drugs are the future and if they realize their potential, the market simply has to price this stock higher.
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