Pfizer Posts 18% Q1 Profit Decline, Cuts Earnings Forecast

Pfizer's Q1 Results Disappointing, but Could Have Been Worse

U.S. pharmaceutical giant Pfizer reported an 18% decline in net profit in the first quarter of 2007 despite a 6% y/y increase in revenue. The y/y change for the company's top and bottom-line results would have been somewhat worse if first-quarter 2006 results had not been restated. Pfizer has not given a reason for the restatement of the results, but Global Insight estimates that the 2006 numbers have been recalculated to exclude the contribution of Pfizer's Consumer Healthcare business recently sold to Johnson & Johnson (U.S.) for US$16.6 billion. Without the recalculation of the base numbers, Pfizer's first-quarter 2007 revenue would have been down by 1.5% instead of being 6% higher y/y. Aside from the restatement, the company's reported first-quarter 2007 6% growth in revenue has also been boosted by 2% as a result of favourable exchange rates.

The first quarter of 2007 saw a 10% y/y decline in sales of Norvasc due to the earlier-than-anticipated loss of patent protection in the United States (see United States: 26 March 2007: Pfizer Launches Norvasc Authorised Generic as Mylan's Copy Hits the U.S. Market). Instead of terminating in September, Pfizer's patent exclusivity for the drug ended in late March due to an adverse court ruling. Considering the patent-protection loss happened so late in the last month of the first quarter, that sharp sales decline is even more significant. Pfizer estimates that the early Norvasc patent-protection loss will cost the company a US$1.2 billion in lost Norvasc sales by year-end; however, this should be mitigated by favourable exchange rates.

Another disappointment from Pfizer was produced by once-hyped inhalable insulin Exubera. Take-up of the drug in the U.S. market has been slow and the drug was said to have a "disappointing revenue performance" although sales were not disclosed. Pfizer plans to re-launch the drug in the coming months with the help of sales efforts targeting primary care physicians and an intensive direct-to-consumer advertising (DTCA) campaign.

In light of these disappointments, support for Pfizer's revenue base came from the usual place: strong sales of the world's best selling drug Lipitor (atorvastatin). The statin managed to boost sales by 8% despite the entry of generics of competitor Zocor (simvastatin) and a greater-than-predicted volume of patient switches to generics, particularly in the managed care environment. Evidence of a stabilisation in Lipitor switching towards the end of the quarter and the recent approval of new indications by the U.S. FDA are expected to boost Lipitor sales, maintaining this revenue stream despite competitive pressures. For the full year, Lipitor sales could grow modestly or decline modestly, according to Pfizer's estimates.

Pfizer's immediate revenue gains are expected to be from nerve-pain drug Lyrica (pregabalin), whose revenues doubled year-on-year in the quarter and from Celebrex (celecoxib). The latter will be boosted by the recent FDA committee rejection of a rival from Merck (Arcoxia) meaning that Celebrex will remain for now the sole Cox-2 inhibitor on the U.S. market. A brand new DTCA campaign for the drug, however, is highly controversial and has the potential to undermine Celebrex sales if it ends up being scrapped by the FDA in a flurry of negative publicity.

Outlook and Implications

In light of the Norvasc patent loss, Pfizer has restated its 2007 and 2008 guidance. For 2007, the new guidance is US$47-48 billion in revenues and US$1.30-1.41 in diluted earnings per share (EPS) and US$2.08-2.15 in adjusted EPS. For 2008, the guidance now given is US$46.5-48.5 billion at current exchange rates; diluted EPS and adjusted EPS guidance remain unchanged.

As the year progresses, the success of Pfizer's recently announced cost-cutting efforts will be closely monitored. The company vowed to cut 10,000 jobs and close five manufacturing plants and five research facilities. The company has touted its plans to boost research productivity by way of its new Pfizer Incubator, designed to foster ties with academic innovators by providing funding for early-stage research. It remains to be seen whether projects such as these will compensate for the loss of in-house R&D. The company currently has 249 experimental drugs in development: of these, HIV treatment maraviroc is due to be evaluated by an FDA advisory committee this week. How well these research projects will be supported remains to be seen. Meanwhile, the looming patent loss for Zyrtec (cetirizine) this year and for Lipitor in 2011 are expected to drive Pfizer to acquire a potential replacement big-earner as it waits for its own late-stage pipeline projects to catch up.