Lipitor Comes Through at Just the Right Time for Pfizer in H1 Results

Industry Leader Makes Its Statement

U.S. drug giant Pfizer yesterday presented its financial results for the second quarter and first half of 2006. Sales were up by 3% year-on-year (y/y) to US$11.7 billion for the quarter, and flat growth was recorded for the half-year, with sales of US$23.5 billion. After significant cost-cutting during the first quarter, Pfizer maintained low-to-mid-single-digit increases in its cost base during the second quarter, with R&D expenditure increasing by 5% y/y to US$1.7 billion, largely on the back of a number of late-stage candidates moving towards filing status. Cost of sales and selling, informational and administrative (SIA) expenses grew by 2% and 3% respectively. Overall, operating income for the year-to-date (YTD) now stands at US$9.5 billion, representing 5.4% growth. This excludes a number of one-off factors, including the redefinition of the company's over-the-counter (OTC) unit as a discontinued business, following its sale to U.S. conglomerate Johnson & Johnson (J&J) last quarter. There is therefore a significant discrepancy between net and operating income, as was the case in Abbott's results, presented earlier this week. Net profits decreased by 30% on the quarter, but the company's strong cost-cutting efforts during the first quarter means that YTD net profits have risen by 73%, to US$6.5 billion.

Pfizer's portfolio performance includes a number of noteworthy indicators. Most importantly, the second quarter saw a pick-up in Lipitor sales, following the flat growth exhibited in the first quarter. This had led many to suspect that flat growth would be the whole story for Lipitor in 2006, due to the entry of generic simvastatin and the pressure placed on Lipitor's reimbursement listings in the post-Medicare Part D U.S. market. Still, Lipitor's second-quarter sales grew by 9% overall to US$3.1 billion, including 11% expansion in the U.S. market. Much of Pfizer's conference call was spent explaining these results, which contradict IMS prescription tracking for the half-year somewhat. IMS shows a flat rate script increase, but Pfizer management explained that Lipitor's list price accounted for a 5% increase, while favourable rebates (+3%) and more higher-dose scripts (+2%) accounted for the rest (inventory levels decreased somewhat, by 2%).

Of course, Pfizer is far from a one-product story, and Lipitor was backed up by a strong performance from Lyrica (pregabalin; nerve pain), which gained 606% to US$271 million for the quarter. Like Merck & Co/Schering-Plough's Vytorin (simvastatin/ezetimibe), combination treatment Caduet (atorvastatin/amlodipine) continues to benefit from a clearer differentiation from statin treatments in the post-generic-simvastatin U.S. market, and YTD sales have increased by 116% to US$157 million. Meanwhile, COX-2 inhibitor Celebrex (celecoxib) continues its recovery from the nadir of 2005, exhibiting strong 17% growth for the quarter. The schizophrenia drug Geodon (ziprasidone), another treatment highlighted by management as a critical growth-driver during this difficult period for Pfizer, increased by 14% y/y to US$165 million during the second quarter.

Outlook and Implications

Exubera and the Rest

Pfizer is only just beginning to see the fruits of its new products, with cancer drug Sutent (sunitinib) showing promising uptake. The comapny has a number of new approvals being prepared for launch, though it has confirmed widely held expectations that the launch of inhaled insulin drug Exubera, originally scheduled for mid-July, will be delayed until September. Global Insight suspects that there may be manufacturing issues here; this will be a tight-margin product, and much of its success will depend on pricing. From our discussions with reimbursement agencies, Pfizer appears to have already acquiesced to a 10-15% lower price for Exubera in negotiations so far.

As things stand, the company is launching a wide-ranging education campaign ahead of the launch, and while this provides the official line for the two-month launch delay, management reiterated the complicated manufacturing process during the conference call, and this may provide a more telling motivation behind the delay. It is still noteworthy that the campaign was not launched earlier, perhaps indicating an underestimation of the scepticism noted so far among both the specialist and general practitioner (GP) community. Once the drug is launched, Pfizer will probably have a staggered, careful strategy of targeting the specialist endocrinology community ahead of a wider roll-out to GPs; sales are therefore likely to be modest initially, before curving sharply upwards.

Pfizer has raised its earnings-per-share guidance by 3.6%, and although this is partially accounted for by an increase in share-repurchasing programmes and improved currency conditions, it also reflects underlying strength from the company's operational base. Pfizer continues to rein in its cost base, and if Lipitor can carry on leveraging growth - a big "if" - then 2006 may not turn out as dark as Pfizer management predicted last year. Still, question marks remain over Exubera, although smoking cessation drug Chantix (varenicline) and new infectious disease products should provide clearer commercial opportunities. Pfizer is estimated to have a "war chest" of around US$29 billion following its consumer health unit sale, and Global Insight expects a couple of major licensing deals and acquisitions during the second half of 2006.

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