- Pfizer may report strong FCFs, but watch out for any signs of revenue growth and updates on Prevnar, Ibrance, Eliquis.
- Currency will remain a major headwind.
- The number one thing to watch will be management’s comments regarding future growth prospects after the fallout of Allergan deal.
Pfizer (NYSE:PFE), one of the world’s leading pharmaceutical companies, will release its quarterly results before the markets open on May 3, just weeks after the US Treasury Department killed its ambitious plan to shift its tax base to Ireland by merging with the Botox maker Allergan (NYSE:AGN).
Pfizer, based in New York, has a truly diversified product portfolio. Unlike some of its peers such as Shire and Gilead, Pfizer gets its revenues from literally hundreds of different products, a large chunk of which are not even listed in its annual report. Its blockbuster drugs, such as Enbrel, Lipitor, Lyrica, Premarin, Prevnar, Sutent and Viagra are responsible for 40% of its annual sales, 30% comes from those drugs that generate less than $1 billion in annual revenues but are well-known, but more than one-fifth of sales come from products that are too small to be individually listed in the annual report. This makes Pfizer one of the rare pharmaceutical companies with no meaningful exposure to any single drug. Moreover, although Pfizer has sold a number of non-core assets over the last few years, it has also spent $25 billion on acquisitions since 2011.
Now Pfizer has been generating reliable free cash flows each year, enough to fully fund its capital spending and dividends. And I believe the first quarter is not going to be any different. But with a massive product portfolio and billions spent on acquisitions, you would also expect Pfizer to consistently grow revenues each year. But that has not been the case.
At a time when the broader pharmaceutical industry managed to grow revenues at an average of 3.2% over the last five years, Pfizer’s revenues declined 6.35%. However, in the previous quarter, the company gave a sales guidance of between $49 billion and $51 billion for the current year. Although that was lower than the analysts’ consensus estimate of $52.5 billion, but at least Pfizer was eyeing 2.4% growth from last year, based on the mid-point of the guidance.
In order to hit the annual revenue target, Pfizer needs to post modest year-over-year growth in the first quarter from last year’s $10.86 billion. The growth will likely be driven in part by the blockbuster Prevnar vaccine and the breast cancer drug Ibrance. Investors need to watch out for Ibrance’s revenue contribution, given the drug is expected to play a crucial role in driving Pfizer’s growth, with sales projected to climb from $720 million last year to $3.2 billion in 2017. We’ll also likely hear more on Phase 3 data for this drug. The blood clot treatment drug Eliquis is also going to be an important product to watch for. So far, Pfizer hasn’t provided the annual revenue numbers for Eliquis, which was developed in collaboration with Bristol-Myers Squibb (NYSE:BMY), but we’ll likely start to hear more from this year. Eliquis sales are forecasted to hit $1.9 billion by 2017.
However, Pfizer, like any other multinational corporation, gets a large chunk of its sales from international markets. This leaves the company exposed to foreign exchange losses. The dollar index, which measures the performance of US dollar against a basket of major currencies, climbed more than 20% between 2014 and mid-2015, and has been holding up the gains since then. The strength in US dollars against other currencies negatively impacts the value of Pfizer’s international sales when they are translated into US dollars. It also makes Pfizer’s products more expensive for foreign buyers.
Moreover, Pfizer also has significant exposure to Venezuela where Enbrel, Lipitor and Norvasc are some of its top selling drugs. The country’s currency, the Bolivar, has been one of the worst performing in the region. Pfizer booked a large $806 million foreign currency loss related to Venezuela. With persistent strength in the greenbacks and further weakness in Bolivar driven by the country’s economic meltdown, investors should continue to expect additional foreign currency losses.
The number one thing to watch in Pfizer’s earnings, however, will be management’s comments regarding future growth prospects after the fallout of Allergan deal. As a reminder, earlier this month, the Obama administration introduced new rules aimed at making tax inversion more difficult, including a provision which was likely meant to end Pfizer’s $160 billion deal. Pfizer has officially killed the merger.
I believe that’s not going to have any meaningful impact on Pfizer’s above-mentioned revenue guidance for the full year since that estimate did not account for the merger. Moreover, Pfizer won’t have to pay the $3.5 billion break-up fee since, as per the terms of the deal, the termination of the agreement due to unfavorable changes in tax laws will lead to charges of just up to $400 million.
But Pfizer can still go after other companies to boost revenues, returns and product portfolio, particularly in the innovative products business. Major companies like GlaxoSmithKline (NYSE:GSK), with a market cap of $103.4 billion, could be on Pfizer’s radar. However, it is more likely that after two big setbacks around acquisition of major drug makers, including the company’s 2014 attempt to acquire its British rival Astrazeneca (NYSE:AZN), Pfizer may focus only on buying small-to-mid-cap biotech companies, including Shire (NASDAQ:SHPG).
Meanwhile, Pfizer’s focus will shift back to splitting the company into two parts – one that markets new, innovative and patent-protected pharmaceuticals and other that makes older, established products. Pfizer has been mulling over separating the innovative products division, which has been growing at strong double-digit rates with 11% growth seen last year, from the established products units that has seen its revenues shrink 14% in the same period, for the last several years.
The separation of the more attractive innovative drugs unit could boost shareholder value, given the business will likely end up trading at a higher multiple of earnings than Pfizer as a whole. Pfizer seems to have also realized that with tightening rules around tax inversion, the split could be the only way to lift shareholder value in the short term. The company expects to complete a review of the potential split by the end of this year – that deadline is two years ahead of Pfizer’s original guidance from last fall. Expect to hear a lot more on this during the first quarter conference call.