Pfizer Stock Floats on Financial Engineering, Not Growth

by Dan Burrows | January 28, 2014 11:39 am

The incredible, shrinking drugmaker known as Pfizer (PFE[1]) reported serious slumps in earnings and sales in the most recent quarter, and yet Wall Street’s expectations were so low that Pfizer stock actually received a boost on the news.

pfizer-stock-pfe-stock-pfizer-earningsPfizer, the No. 1 pharmaceutical company in the U.S., has been getting a lot smaller lately. Part of that has been intentional, as the company seeks to support Pfizer stock by shedding assets and operations.

But mostly the shrinkage is due to a lack of new blockbuster drugs — ones that would replace the former cash machines of Lipitor and Viagra, which are now available as generics. Losing exclusivity on a best-seller is bad for any pharma stock. Not having another one in the pipeline ready to go is especially painful, as anyone holding Pfizer stock has noticed by now.

For the most recent quarter, Pfizer earnings dropped 59%, although a lot of that decline comes from tough year-over-year comparisons. (Pfizer sold its nutrition business to Nestle [NSRGY[2]] last year.) On an adjusted basis, earnings hit 56 cents a share, beating analysts’ average estimate by 4 cents. PFE also issued full-year guidance in line with analysts’ forecasts.

That’s an OK reason for the market to lift Pfizer stock — at least early in a trading session — but the fact remains that profits received no help from revenue. Indeed, sales fell 2.4% to $13.56 billion. Yes, that still beat the Street — and would have turned slightly positive if not for the effects of foreign exchange — but it hardly screams growth.

Financial Engineering Keeps Pfizer Stock Afloat

The broader story, however, remains the same. If Pfizer stock is getting any support at all, it’s from cost cuts and financial engineering in the form of share buybacks — not top-line growth.

Pfizer’s retrenchment directly stems from rapidly deteriorating sales of cholesterol-control drug Lipitor, as well as flaccid sales of Viagra.

Indeed, Lipitor was the world’s top-selling drug for almost a decade — which was great news for Pfizer stock — until PFE lost its exclusive rights to sell it in the U.S. in 2011 and in Europe in 2012.

Once upon a time, Pfizer’s quarterly Lipitor sales averaged more than $3 billion. But generic competition has since wiped most of that away. Although Lipitor sales did rise 4.6% in the most recent quarter, the take came to just $611 million — a fraction of what the drug brought in when it was exclusive to Pfizer.

At the same time, Viagra sales declined 14% to $476 million. True, sales of Lyrica — Pfizer’s new No. 1 drug — rose 11% to $1.26 million in the quarter, but that’s not enough to make up for the shortfalls elsewhere. It also doesn’t help Pfizer stock that the company faces patent expirations on other drugs, including Celebrex and Zyvox.

As nice as the pop in Pfizer stock was, the big picture hasn’t changed. While PFE does sport an attractive 3.4% dividend, shares are up just 13% during the past 52 weeks, lagging both their peer group[3] and the broader market by a wide margin.

Perhaps the best thing the company could do is split itself into fast-growth and slow-growth businesses, as some analysts and investors are urging.

Barring that, Pfizer stock will likely continue to underperform.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

  1. PFE:
  2. NSRGY:
  3. lagging both their peer group:

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