Pfizer Earnings Preview: Patent Cliff Still Looming

Analysts have been revising revenue and EPS downward

Pfizer Inc. (NYSE:PFE) may not the dominant drug kingpin it once was when cholesterol-fighting drug Lipitor was growing its top line by double digits, but don’t tell that to retail investors who are enjoying 21% gains in Pfizer stock in the past six months.

pfizer-pfe-stock-logo-185Pfizer stock is now up more than 13% on the year-to-date, besting both the Dow Jones Industrial Average and the S&P 500.

But ahead of Pfizer’s first-quarter earnings Tuesday, can this outperformance continue from the blue-chip drugmaker?

With several key drugs approaching the patent cliff, that’s not a bet I’m willing to make with my own money. Not to mention, the strong U.S. dollar is likely to pressure Pfizer and Pfizer stock in the quarters ahead.

Expectations for the Quarter

Investors who are holding Pfizer stock ahead of Tuesday results are hoping for the best. I wouldn’t bet the farm on a dominant performance, however. Not if analysts’ estimates serve as indication.

Analysts have lowered earnings estimates by 4% in the past three months. Moreover, estimates for the June quarter and for the full year have fallen are 2% and 6%, respectively in the past 90 days. Those adjustments do not bode well for Pfizer stock.

All told, analysts will be looking for earnings of 49 cents per share this quarter, marking a year-over-year decline of 14%, on revenue of $10.73 billion (a 5% decline). For the full year, earnings per share are expected to fall more than 8% to $2.07 per share, while full-year revenue of $46 billion suggests a decline of around 7%.

Whenever estimates are revised lower, investors must stop and reevaluate their positions. In this case, Pfizer stock has been one of the better performing health care stocks in the S&P 500, also besting the 8% gains in the Health Care Select Sector SPDR Fund, which means investors might be looking for a reason to lock in recent gains.

The Patent Cliff Still an Overhang

Before Pfizer stock can be a worthwhile hold — even in the near term — the company must show that it can stabilize revenue, which has gotten punished in the wake of various patent losses.

The are also concerns about Pfizer’s blockbuster arthritis drug Celebrex, whose patent expires on Dec. 2, 2015. Once Celebrex loses exclusivity, cheaper generic alternatives will hit retail shelves, eating away at Pfizer’s revenue. And with close to $3 billion in revenue last year, Celebrex ranks as Pfizer’s fourth-bestselling product.

Perhaps more impressively, Celebrex has had one of the highest gross margins in Pfizer’s portfolio, generating roughly 90%. This means Pfizer has earns almost pure profit for each dollar Celebrex generates is revenue.

True, Celebrex is just one of many products in Pfizer’s pipeline. And the company does have several dozen products in phase 3 development or later. That said, Pfizer management must still address how the company plans to offset the loss of Celebrex once it loses the patent.

Until then, it’s tough to recommend Pfizer stock — even as a long-term play. Investors will want to hear what management says about its cost-cutting efforts. Specifically, have the cost reductions tempered a drop in sales?

Bottom Line on Pfizer Stock

With Pfizer stock trading at near 52-week highs, the risk vs. reward ratio tilts negatively, especially with its P/E of 25 — a premium to the S&P 500. Pfizer stock doesn’t have a lot of room for error, and with analysts lowering their estimates, the future doesn’t look very bright.

Considering the headwinds and upcoming patent cliff, I would sell here and look to buy Pfizer stock at around $33 per share, which is right around its 100-day moving average.

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

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