by Clement Thibault
Pfizer Inc (NYSE:PFE), the global biopharmaceutical company which discovers, develops and manufactures healthcare products, will report Q3 2016 earnings on Tuesday November 1st, before the market opens.
1. Earnings and revenue
Pfizer is expected to report earnings of $0.49 per share alongside $13.03 billion in revenue. Year-over-year, this would represent growth of about 7.2% in revenue.
2. Breaking Up Is Hard To Do
Over the past few years, Pfizer reorganized its lines of business into two segments; Essential Health, under which most of its legacy drugs such as Lipitor and Viagra operate, and Innovative Health which focuses primarily on new drug development and is currently the fastest growing PFE segment. One of the key strategic decisions Pfizer management made during the past quarter was not to spin off the Innovative Health division into a separate company.
The decision was announced on September 26th after the company spent almost four years—and $600 million—evaluating its options, much to the chagrin of Wall Street analysts who thought that the combined value of two separate companies would be bigger than Pfizer's valuation is today. This is certainly a conservative approach by Pfizer, and will likely hamper Innovative Health's growth, though it will generate a more robust cash flow.
3. Legacy Drugs
Pfizer's two most lucrative drugs last quarter were Prevenar 13 and Lyrica.
Prevenar 13 is a one-time vaccine for the prevention of the thirteen most common forms of pneumococcal pneumonia. On its own, Prevenar 13 brought in $1.25 billion just during the last quarter.It was first introduced at the end of 2009 in Europe for infants and young children, rolled out to the US in 2010 and in 2013 was approved for use in 120 countries worldwide. At the same time it was approved for non-vaccinated children and adolescents as well as adults aged 50 plus. Going forward however, sales of Prevenar 13 are expected to slow given its already extended reach, but the recent approval of the drug for adults aged 18-49 should steady sales for a while.
Lyrica, Pfizer's second biggest blockbuster drug, also brought in a total of $1.25 billion. Lyrica is an anti-epileptic drug, slowing down the impulses in the brain that cause seizures. It's also used to treat neuropathic pain, fibromyalgia and certain anxiety disorders. Its revenue is stable and expected to grow in the single digits over the next two years, until the expiration of the Pfizer-owned patent on the drug in December 2018.
Pfizer has eight additional major drugs which are each expected to generate a billion dollars in revenue this year. Because patents protect drugs from being copied for a total of 20 years, revenue from any blockbuster drug has a limited lifespan. Thus, for the investor, aside from current revenue generators the upcoming pipeline is as important as—if not more important than—existing drugs.
4. Building a Healthy Pipeline
Because patents only protect new drugs from copycat products for a total of 20 years, revenue from any blockbuster introduction has a limited lifespan. Thus, for the investor, along with current revenue generators, it's critical to be aware of what a pharmaceutical company also has in its R&D pipeline.
In order to keep its top line from stagnating, Pfizer is currently working on two fronts. First, the company invests about $7 billion annually in research and development, with the aim of creating its next best seller.
Ibrance was introduced in early 2015 for treatment of ER+, HER2 metastatic breast cancer. Since its initial introduction it's been expanded for use with additional patient populations; Pfizer is also currently working to receive approvals for expansion to other forms of cancer, such as pancreatic cancer, as well. Ibrance is already on pace to make almost a billion dollars this year, but if Pfizer's expansion plans succeed, new markets will open for the drug with additional revenue sources emerging.
Perhaps more significant, Pfizer continues to make strategic acquisitions as an additional way to increase or expand their drug pipelines. At the end of 2015, Pfizer attempted a $160 billion merger with Ireland-based Allergan(NYSE:AGN) which was ultimately scrapped because of changes to US tax rules which made the deal less appealing for the US-based pharmaceuticals giant. The deal's cancellation freed up funds for smaller acquisitions.
On September 27th, Pfizer acquired Medivation for $14 billion dollars. This allows Pfizer to add Xtandi, a prostate cancer drug, to its oncological lineup. The Medivation acquisition also brings another important potential drug to the PFE portfolio – Talazoparib – which blocks an enzyme that's integral to cancer cell development. A number of companies such as AstraZeneca (NYSE:AZN) and AbbVie (NYSE:ABBV) are also working on similar drugs; Talazoparib trials are scheduled to end during June 2017. Though there's no guarantee this new drug will become a blockbuster, chances are good that it might. But even if it doesn't, this sort of acquisition expands Pfizer's offering and its future capabilities.
5. Handsome Dividend
As a result of the drop in Pfizer's stock price over the last few months—when it fell from $37 in July to trade around $32 today—Pfizer's dividend is worth considering. Over the past four quarters the declared dividend has been 30-cents per quarter, or $1.2 dollars annually, for a yield of 3.75%.
Though Pfizer cut its dividend back in 2009 by 50%, from 32-cents per quarter to 16-cents, in order to help finance the $68 billion acquisition of Wyeth at that time, the company has been slowly but steadly growing it back, and has regularly increased its payout for the past seven years.
Pfizer's next ex-dividend date is November 8th, and it is expected to grow its dividend again by two or three cents. Given expected GAAP earnings of $0.49 and non-GAAP earnings of $0.62 for the company this quarter, the payout ceiling is not stretched in any way. In today's yield starved world, a safe and growing dividend from an industry that's always going to be necessary is worth a second look.
Conclusion
Pfizer's P/E ratio of 28 is 20% higher than the industry average, which comes in at around 23. Solely by that measure Pfizer would be considered expensive, although its dividend would prevent it from being categorized as totally overpriced. However, when considering different measures such as the Price-to-Book, where Pfizer compares favorably to peers such as Merck (NYSE:MRK) and Eli Lilly (NYSE:LLY), with a ratio of 3 to the industry's 3.5, it's obvious there's more to Pfizer than just immediate earnings. Its Free Cash Flow, for example, is a massive $13 billion TTM, 33% more than Merck, and its Price-to-FCF ratio of 15 is less than half the industry average.
Even with its higher P/E Pfizer should still be considered a safe investment. And its prospects, especially its oncology portfolio, appear solid enough for yield-starved investors to consider the stock. Its recent share price tumble provides a dual opportunity—to lock in an attractive dividend yield while potentially returning value on the price itself.