Pfizer (PFE) Beats On Q2 Earnings, To Merge Upjohn With Mylan

Pfizer, Inc. (NYSE:PFE) reported second-quarter 2019 adjusted earnings per share of 80 cents, which beat the Zacks Consensus Estimate of 77 cents. Earnings rose 4% year over year.

The pharma heavyweight recorded revenues of $13.26 billion, which missed the Zacks Consensus Estimate of $13.32 billion. Revenues declined 2% from the year-ago quarter on a reported basis. On an operational basis, excluding the 4% negative impact of currency, revenues rose 2% year over year as higher sales of some key brands in Pfizer’s Biopharmaceuticals group was partially offset by generic/biosimilar competition for products that have lost marketing exclusivity, and decline of Upjohn revenues in China.

International revenues declined 4% to $6.93 billion. However, on an operational basis, international sales rose 3% in the quarter. U.S. revenues were up 2% to $6.34 billion.

Adjusted selling, informational and administrative (SI&A) expenses rose 2% (operationally) in the quarter to $3.46 billion. Adjusted R&D expenses declined 3% to $1.83 billion.

Announces Merger of Upjohn and Mylan

Amid rumors that surfaced a day before, Pfizer announced a definitive agreement to spin-off its Upjohn unit and combine it with generic drugmaker Mylan N.V. (NASDAQ:MYL) in a Reverse Morris Trust transaction to create a new generic pharmaceutical company. Upjohn is Pfizer’s global, off-patent branded and generic established medicines business. The new company, with brands like EpiPen, Lipitor and Viagra, is expected to generate revenues between $19 billion and $20 billion.

Per the terms of the deal, each Mylan share would be converted into one share of the new company. Pfizer shareholders will own 57% stake in the new company while Mylan’s stockholders will get 43% of the new entity. Pfizer’s current head of the Upjohn unit, Michael Goettler will become the CEO of the new company while Mylan’s current CEO, Heather Bresch, will retire when the deal closes. The deal is expected to close by mid-2020. The deal has been approved by the boards of both the companies.

Segment Discussion

In 2018, Pfizer’s reporting segments were Pfizer Innovative Health (IH) and Pfizer Essential Health (EH).Beginning the first quarter of 2019, Pfizer started reporting under three new business units — Pfizer Biopharmaceuticals Group (previous IH unit except Consumer Healthcare), Upjohn (previous EH unit) and Consumer Healthcare.

Pfizer Biopharma sales grew 2% on a reported basis (up 6% an operational basis) from the year-ago period to $9.6 billion. Higher sales of Eliquis, Ibrance and Xeljanz drove this segment’s sales. Weaker sales of Prevnar 13/Prevenar 13 however partially offset the increase.

Within the Biopharma group, Oncology revenues increased 23% to $2.24 billion. Vaccine revenues rose 2% to $1.38 billion. Internal Medicine rose 6% to $2.33 billion. The Inflammation & Immunology franchise rose 5% to $1.22 billion. However, the portfolio of Rare Disease declined 2% to $521 million. The newly added Hospital sub-segment’s sales declined 4% to $1.91 billion. The Hospital segment comprises Pfizer’s global portfolio of sterile injectable and anti-infective medicines.

Pfizer’s Upjohn group’s sales declined 11% to $3.81 billion. On an operational basis, sales declined 7% in the segment due to lower revenues in China and the United States.

Revenues from the Consumer Healthcare unit declined 3% to $862 million. However, on an operational basis, sales rose 1% as lower sales in the U.S. market were offset by higher sales in international markets.

We remind investors that Pfizer’s Consumer Healthcare unit will merge with Glaxo’s (NYSE:GSK) unit to form a new joint venture (JV). Pfizer will own a stake of 32% in the JV. Pfizer had been exploring strategic options for its Consumer Healthcare unit since October 2017. The formation of the JV is anticipated on Aug 1.

Performance of Key Drugs

Ibrance revenues rose 27% year over year to $1.26 billion on continued strong uptake in international markets and consistent growth in the United States.

Xeljanz sales rose 36% to $613 million driven by continued growth in rheumatoid arthritis (RA) revenues and contributions from the drug's recent expansion into psoriatic arthritis and ulcerative colitis in the United States and only ulcerative colitis indication in certain developed markets.

Global Prevnar 13/Prevenar 13 revenues declined 3% to $1.18 billion. Prevnar 13 revenues declined 10% in the United States, reflecting decreased government purchases for the pediatric indication and continued decline in revenues for the adult indication. Prevenar 13 revenues rose 6% in international markets.

Enbrel revenues declined 16% to $420 million in key European markets due to continued biosimilar competition as well as unfavorable timing of government purchases in certain emerging markets. Pfizer has exclusive rights to Amgen’s blockbuster RA drug, Enbrel, outside the United States and Canada.

Xalkori sales rose 2% to $133 million. Sutent sales declined 4% to $248 million. Eliquis alliance revenues and direct sales rose 26% to $1.09 billion. Chantix sales rose 1% to $276 million in the quarter. Xtandi recorded alliance revenues of $201 million in the quarter, up 18% year over year.

Inflectra, Pfizer’s biosimilar version of J&J (NYSE:JNJ) and Merck’s blockbuster RA drug, Remicade, recorded sales of $53 million globally, flat year over year.

In the Upjohn segment, sales of key drug Lyrica declined 1% to $1.18 billion reflecting wholesaler destocking ahead of the drug’s loss of exclusivity (LOE), which began in July. Viagra sales declined 35% to $114 million due to generic competition that began in December 2017.

2019 Guidance

Pfizer lowered its previously issued sales and earnings guidance for 2019. Revenues are expected in the range of $50.5 billion to $52.5 billion compared with $52.0 billion to $54.0 billion expected previously. Adjusted earnings per share are expected in the range of $2.76-$2.86 versus the previous expectation of $2.83-$2.93

Research and development expense is expected in the range of $7.9–$8.3 billion versus $7.8–$8.3 billion while SI&A spending is projected in the range of $13.0–$14.0 billion versus $13.5 –$14.5 billion expected earlier. Adjusted tax rate is still expected to be approximately 16% in 2019.

Our Take

Pfizer posted mixed results for the second quarter of 2019. While it beat earnings estimates, it fell short of the consensus mark for revenues The company lowered its guidance for full-year sales to reflect the formation of the Consumer Healthcare JV with Glaxo and the anticipated near-term completion of Array BioPharma (NASDAQ:ARRY) acquisition. Last month, Pfizer announced a definitive agreement to buy Array BioPharma for $48 per share in cash for a total enterprise value of approximately $11.4 billion, in a bid to strengthen its cancer portfolio.

The announcement of the tie-up of Upjohn with Mylan hit the headlines. Mylan’s shares rose around 13% in pre-market trading as this was probably the best option for the generic drugmaker whose shares have been declining so far this year. However, Pfizer’s shares declined more than 3% in pre-market trading. Pfizer’s shares have declined 1.3% this year so far compared with no movement for the industry.

Pfizer expects continued strong growth of key product franchises, including Ibrance, Eliquis, and Xeljanz in the second half 2019. However, currency headwinds, weak sales in the sterile injectables portfolio, pricing pressure and rising competition are some top-line headwinds.

Pfizer is strengthening its pipeline as well as oncology portfolio. In the second quarter, Pfizer gained FDA approval for tafamidis to treat transthyretin amyloid cardiomyopathy; for Bavencio+Inlyta combo for first-line treatment of advanced renal cell carcinoma and for Zirabev and Ruxience, its biosimilar versions of Roche’s cancer drugs Avastin and Rituxan, respectively. Pfizer also gained EU approval for new cancer drugs, Talzenna, Vizimpro and Lorviqua. All these new drug approvals may contribute to sales growth in the second half.

Pfizer currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.