Pfizer (PFE) and Merck (MRK) have a serious drug problem.
The nation’s two biggest drugmakers got addicted to Lipitor and Singulair, and now that those blockbuster medications have gone generic, sales and earnings at both companies are going through withdrawal.
Pfizer and Merck, both components of the Dow Jones Industrial Average, reported mixed — and noisy — quarterly results. Sales are especially a concern at both firms as they hunt for new blockbuster drugs to replace ones that have recently gone off-patent.
That has cheaper, low-margin versions of two of the world’s best-selling drugs stealing market share from the companies’ own high-priced, high-margin brand-name medications — and it’s really messing with results.
Pfizer, the No. 1 U.S. drugmaker, fared the better of the two. Excluding asset sales, restructuring charges and other items, earnings came to 56 cents a share, or a penny better than Wall Street’s forecast.
Revenue, however, fell more sharply than analysts’ average projection. The top line contracted by 7.1% to $12.97 billion, where Wall Street was looking for $13.01 billion. Blame rapidly deteriorating sales of the cholesterol-control drug Lipitor.
Indeed, Lipitor was the world’s top-selling drug for almost a decade — which was great news for Pfizer — until the company lost its exclusive rights to sell it in the U.S. in 2011 and in Europe last year.
Once upon a time, Pfizer’s quarterly Lipitor sales averaged more than $3 billion. But generic competition has since wiped most of that away: In the most recent quarter, Lipitor sales fell by more than half to $484 million.
Still, there was some encouraging news out of the company. Pfizer maintained its full-year profit outlook; it announced a new corporate structure, which will make it easier to split the company up into fast-growth and slow-growth businesses in the years to come; and — most importantly — it announced a $10 billion share repurchase program.
Take the 3.3% yield on the dividend and the $10 billion stock buyback and it’s clear Pfizer is determined to do right by its equity income shareholder base.
Just as Pfizer got hooked on Lipitor, Merck became addicted to Singulair, and the weaning process has been painful.
Like rival Pfizer, profit beat the Street’s forecast by a penny share after excluding a list of special items. And revenue declined sharply to miss estimates by a wide margin. The top-line fell by 11% to $11.01 billion vs. an average forecast of $11.22 billion.
The bottom line is that earnings fell 50%, hurt by an 80% drop in sales of Singulair. The blockbuster allergy and asthma medication was the 11th best-selling drug in the world until Merck lost exclusive rights to sell it last year and cheaper generics swamped the market.
At the same time, business wasn’t all that great elsewhere in the company’s portfolio of drugs. Revenue from Merck’s current No. 1 drug — Januvia for type 2 diabetes — ticked up just 1% to $1.07 billion. Sales from the over-the-counter division, which includes Claritin, Afrin and Dr. Scholl’s, tumbled 11% to less than $500 million.
Adding to investors’ concerns is that although Merck maintained its full-year profit outlook, it reduced its revenue forecast. In effect, the company is saying “don’t look for growth here anytime soon.”
Merck needs to return to top-line growth if it hopes to get its stock moving. At this point, it looks like it will be a sideways trade, at best.
The generous 3.5% yield on the dividend makes Merck look like a core equity-income holding — but then it’s easy to envision the stock losing at least that much on a price basis before it delivers another hit drug.
Given the relative merits of the two, Pfizer looks like the better stock at this point for driving total return through dividends and buybacks.
As of the writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.