- Pfizer’s top line is finally showing signs of growth even without counting Hospira.
- However, net income has taken a hit in the past six months.
- How does the Medivation acquisition impact its long-term prospects, if at all?
In the first six months of this year Pfizer (NYSE:PFE) reported a revenue growth of 15%, from $22.7 billion last year to $26.1 billion this year. But the show of strength in top line didn't filter down to the bottom line as Pfizer's reported net income came in nearly flat, growing by 1% from $5.002 billion last year to $5.036 billion this year. A 15% top line jump looks mouthwatering, but the real reason top line went up that much was due to the acquisition of Hospira, the world’s largest provider of injectable drugs, for nearly $17 billion.
The Revenue Slide
Pfizer’s revenue has been steadily declining since peaking in 2011 at $65.26 billion, down to 48.85 billion in 2015. The company was hit hard by a string of patent expirations in the last five years, leading to billions of dollars in sales erosion from competing generics.
After nearly five long years, thanks to Hospira and few of Pfizer’s own products, the company is expecting to post sales growth this year. Having revised its guidance upwards, the company now expects to hit $51 to $53 billion in sales for the current fiscal year. Though that’s still light years away from their peak of 2011, it will be a welcome change for investors who may have gotten used to seeing Pfizer’s revenue sliding quarter after quarter for the last five years.
Bittersweet Numbers On A YTD Basis
The key sales metric that we need to take note of is that including Hospira’s numbers Pfizer’s sales grew 15% in the first six months, while excluding Hospira Pfizer’s sales still grew a healthy 5%. However, operating income fell 10% from $6.6 billion in the first half of last year to $5.9 billion this year.
Part of that comes from the fact that Pfizer had set aside $486 million to settle lawsuits related to its painkillers Celebrex and Bextra. The company was accused of covering up the negative side effects. Restructuring and acquisition related costs also jumped from $146 million last year to $457 million this year, effectively causing the fall in operating income.
Though both these line items - restructuring and legal issues - are one time events with short term impact, the fall in profits did its damage, exerting downward pressure on the stock since the release of second quarter results, snapping the upward trend the stock experienced in the first half of this year.
A Robust Product Portfolio But A Mixed Bag
Pfizer’s product lineup has heavy doses of blockbuster drugs. In the first six months Lyrica brought in $2 billion and Prevnar did $2.7 billion. Ibrance, their new oncology drug, made $942 million and Enbrel brought in $1.5 billion while Lipitor did $872 million. Together, these five products generated $8.1 billion in sales, accounting for 31% of their sales in the first half the year. Ibrance, their breast cancer pill, is already showing signs of being a massive blockbuster and holds a lot of promise for the company.
On the other side, the one big headache that Pfizer has is Prevnar, Pfizer’s vaccines for pneumococcal diseases which declined 16% from $1.503 billion during the second quarter of last year to $1.258 billion this year. The company now expects overall sales for the vaccine to come in slightly below their 2015 sales, and edge even lower over subsequent fiscals.
From Q2 16 Earnings Transcript:
“Our Prevnar 13 franchise continues to be a significant contributor. With the success of our adult launch in the U.S., approximately 40% of the adult 65-and-plus population had been vaccinated as of the end of June. Achieving year-over-year growth is now more difficult because of the reduction in the number of U.S. adults over 65 who have not received their Prevnar 13 shot. We do, however, expect overall global Prevnar franchise sales for the full year will be comparable to slightly below 2015 levels.”
Where Does Pfizer Stand?
So the first half of the year has been a mixed bag for Pfizer. The company is on its way to posting sales growth after several years of decline, but profits are flat lining because of legal issues and the restructuring related to acquisitions.
There are a few patent-protected products growing fast, but the gains are being bled out by legacy products that are losing sales. Pfizer recently announced that it will be buying Medivation Inc, for $14 billion and the acquisition brings the blockbuster prostate cancer drug Xtandi under Pfizer’s fold.
“The planned purchase of Medivation, with its $2.2 billion-a-year Xtandi, is the latest in a number of deals by large drugmakers willing to pay top dollar for cancer drugs that are more effective than standard, older treatments.” - Reuters
Considering the fact that the company actually revised its guidance upwards this year Pfizer looks to be on a solid ground for the short term. But things are not very clear for the long term, especially regarding the tightrope performance of their product portfolio even though the top line will get a booster shot from the acquisition of Medivation. That is also possibly the reason why the stock is only up 7% in one year and is still trading at 17 times earnings.