Sales Down, Spirits Up as Pfizer Publishes Q1 Results

Pfizer presented its highly anticipated results for the first quarter of 2006 yesterday, providing an early indicator for what lies ahead this year in the U.S. market, in the wake of the Medicare Modernization Act (MMA) and the entry of generic competition for Zocor (simvastatin). As it stands, year-on-year (y/y) comparisons were difficult to assess, due to the vast number of extraordinary items that decimated Pfizer's results in the first quarter of 2005; however, net income increased from US$301 million to US$4.1 billion year-on-year. This was largely due to a number of deductions, merger-related items, inventory write-offs for deleted arthritis drug Bextra (valdeboxib) and tax provisions that hit the first quarter of 2005, during which net income dropped by 87% y/y, and analysis of operating income, which increased by 4.7% y/y, provides a more telling indicator of Pfizer's underlying performance. This clearly shows a ship that is steadying itself through vast cost-cutting, as Pfizer is not able to rely on sales for growth; top-line revenues decreased by 3%, having been hit by patent expirations for some of its best-selling products. Instead, operating income margins appear relatively healthy, as Pfizer cut both R&D and cost of sales expenditure by 10% each, in addition to a notable 7% cut in selling, informational and administrative (SIA) costs.

Pfizer's product sales highlight the increasing visibility of drugs that have not had an auspicious commercial profile over the past couple of years. In particular, there appears to be a marked shift in favour of cardiovascular combination therapy Caduet (atorvastatin/amlodipine), which saw sales growth of 147%, with marketing for this drug perhaps coming at the expense of Lipitor (atorvastatin). U.S. sales of Lipitor grew by 3%, in line with its performance in the final quarter of last year, and far below what many analysts - and Pfizer officials themselves - had hoped. As expected, Pfizer's next-generation Neurontin (gabapentin) therapy Lyrica (pregabalin) is beginning to flex its commercial muscle, increasing by 860% y/y, while new boy oncology treatment Sutent (sunitinib) brought in US$16 million during its first quarter on the market. There was a notable recovery in Pfizer's arthritis franchise, which benefited from y/y comparisons against the highly volatile first quarter of 2005, and sales of Celebrex (celecoxib) grew by 19% to US$491 million.

Outlook and Implications

Pfizer's first quarter of 2006 provides some telling bright spots in the shape of growth from the Lyrica and Caduet franchises, as well as the seeming recovery of Celebrex. Pfizer has also elevated schizophrenia treatment Geodon (ziprasidone) as a core near-term growthdriver, with sales increasing by 32% y/y. It is also promising to see the entry of new products such as Sutent, as Pfizer's 2006 looks set to provide a number of new candidates on the market. Pfizer's position is clearly forced in this regard, as its competitive profile in a number of franchises that have driven growth over the past few years - most notably Lipitor - are not pulling their weight. Geographically, there is a clear shift in Pfizer's operations. While last year's margins were saved by its performance abroad, the first quarter of 2006 indicates a complete reversal in this regard; U.S. pharmaceutical sales fell by 18% during the final quarter of 2005, but increased by 2% during the first quarter of 2006, while international sales grew by 7% in 2005, and fell dramatically by 10% during the first three months of this year.

Cost-Cutting

This global shift in healthy sales indicates that Pfizer's much-vaunted Adapting-to-Scale (AtS) programme is beginning to have implications for the company's sales; the wide-ranging cost-cutting seen in its operating income has largely been focused on the overseas units of former Pharmacia and Warner-Lambert. Savings from AtS during the first quarter of 2006 totalled around US$500 million, and annual savings are expected to amount to US$2 billion, growing to about US$4 billion in 2008. Costs relating to the AtS productivity initiative were US$487 million during the first quarter of 2006, with full-year costs now projected to reach US$1.8-2.2 billion, pre-tax. Pfizer expects the costs associated with AtS to continue through 2008, and to total US$4.0-5.0 billion, pre-tax.

Cholesterol

Lipitor's 3% increase in the U.S. market was below most market expectations, and does not provide a solid basis for assuming significant growth in 2006, as Pfizer had indicated at its analysts' meeting in February. During the second quarter of 2006, the U.S. cholesterol market will face the entry of generic competition to Merck & Co's (U.S.) rival statin Zocor (simvastatin) and Bristol-Myers Squibb's (BMS) Pravachol (pravastatin), and while Lipitor has gained relatively favourable formulary positions, this does not appear to be translating into strong consumer demand. After widespread resistance in the past, payors and prescribers now appear to be favouring combination therapies that are more clearly differentiated from isolated statins. This is seen in Caduet's strong performance, and is likely to be mimicked by Merck and Schering-Plough's (U.S.) Vytorin (simvastatin/ezetimibe), at the expense of other statins such as AstraZeneca's (U.K.) Crestor (rosuvastatin). Pfizer was notably more cautious in its assessment of Lipitor yesterday, and expects 2006 sales of US$13 billion for the drug, underperforming last year's 12% growth, which translated to sales of US$12.2 billion.

Pipeline

For Pfizer's pipeline, this early demonstration of increasing community acceptance of combination therapies bodes well, particularly for the much-vaunted Lipitor follow-up torceptrapib/atorvastatin. Concerns remain over the precise safety profile of this Phase III blockbuster candidate, but Pfizer maintains that further dosing studies should clear up the cardiac signals that have appeared thus far. Meanwhile, the company engaged in a highly active licensing and acquisitions strategy during the first quarter, as it sought to come closer to keeping its promise of filing 20 drugs in the five years to 2006. Having acquired full rights to inhaled insulin Exubera (insulin), which should be launched by June, from Sanofi-Aventis (France), Pfizer has taken over Rinat Neuroscience (U.S.), expanded its partnership with NicOx (U.S.) and, most recently, acquired filed incontinence treatment fesoterodine from Schwarz Pharma (Germany). Pfizer has already received approval for Sutent, Exubera and anti-fungal Eraxis (anidulafungin) during the first quarter, and expects action on smoking-cessation treatment varenicline, Eraxis' step-brother Zeven (dalbavancin) and insomnia treatment indiplon in 2006.

Guidance

In terms of guidance, Pfizer is mainly looking beyond 2006, and the company made no changes to forecasts announced at the analysts' meeting. Revenues for 2006 are expected to be in line with 2005, with an reported diluted earnings-per-share of US$1.56-1.60.

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