The Rising Influence of Rising Affluence

[DewDiligence]

New Pfizer CEO Slashes R&D, Retains 2012 EPS Guidance

[PFE was +5.5% today, which I think is the biggest 1-day up move PFE has had since it prevailed in the Lipitor patent suit several years ago. While the business press is focusing on cost-cutting and the new $5B share-buyback program, the real story for PFE is The Global Demographic Tailwind. Although PFE is currently getting only 14% of sales from emerging markets, these sales grew 25% YoY in 4Q10 and they will account for essentially all of PFE’s future growth. Analysts who continue to talk about the looming patent expiration for Lipitor are missing the boat.

As part of the cost-cutting maneuvers announced today, PFE will phase out drug development in allergy, respiratory, urology, tissue repair, and internal medicine. (PFE discontinued drug development in cardiology in 2008: #msg-32523077.)

PFE reiterated 2012 (post-Lipitor-patent-expiration) non-GAAP EPS guidance of $2.25-2.35, which equates to a forward P/E of less than 9x. Unless you think PFE’s management is out to lunch, it’s hard to say that the stock is not a screaming buy.]

http://www.reuters.com/article/2011/02/01/pfizer-idUSN0112596620110201?feedType=RSS&feedName=marketsNews&rpc=43

›Tue Feb 1, 2011 4:46pm EST
By Ransdell Pierson

NEW YORK, Feb 1 (Reuters) - Pfizer Inc Chief Executive Ian Read is slashing the massive research budget at the world's largest drugmaker to deliver on a 2012 profit forecast and allay Wall Street concerns the company has become too large.

Read, who took the helm in December after the abrupt departure of predecessor Jeffrey Kindler [#msg-57405627], is laying off more than 2,000 researchers and said further steps were likely to shrink Pfizer's (PFE) operations as it girds for the loss of billions in revenue from drugs whose patents are expiring.

Pfizer's actions were long-awaited by investors, who have criticized the company for becoming bloated after three mega-mergers. Its shares rose 5.5 percent.

Pfizer will cut 2012 research and development spending by as much as $2 billion from a planned $8 billion to $8.5 billion -- the industry's largest R&D budget. It will also increase its share buyback program by an additional $5 billion.

It plans to shut its research center in Sandwich, England, eliminating all but a few hundred of its 2,400 employees, and lay off or transfer 1,100 employees in Groton, Connecticut.

David Maris, analyst for CLSA Asia-Pacific Markets, said Pfizer's stock -- trading at about a 20 percent discount to rival large drugmakers -- is "cheap" and will be an even better value as it takes more shares out of circulation. [I agree.]

"People will start to play catch-up with this unloved name that will not win style points for amazing execution, but will win points for value," Maris said in a research note.

Pfizer faces an unprecedented challenge in November, when cholesterol fighter Lipitor, which had $10.7 billion in sales last year, loses U.S. marketing exclusivity. [However, after the patent expiration Lipitor will continue to be one of PFE’s biggest-selling drugs due to branded-generic sales in emerging markets.] Pfizer bought Wyeth in late 2009 for $67 billion to replace vanishing Lipitor revenue, but has failed to greatly bolster its drug portfolio.

More than a half dozen other Pfizer drugs also lose U.S. patent protection in the next few years, including impotence treatment Viagra and Xalatan for glaucoma.

Read said the company would finish a review of its businesses this year "to determine the optimal mix ... that we can appropriately fund and manage in order to achieve consistent growth."

He also promised greater accountability in research spending. In the past, the company "continued to develop products with big bets even though the science wasn't solid," Read said. He mentioned as one example Exubera, Pfizer's inhaled insulin that was a commercial flop.

"We need a focus at each stage. We need individuals to stand up and take accountability," Read told reporters. "If we don't have the data, we won't continue to invest."

Pfizer said it still expected 2012 earnings, excluding special items, of $2.25 to $2.35 per share, slightly above 2011. It expects 2012 revenue of $63 billion to $65.5 billion, down from its earlier view of $65.2 billion to $67.7 billion, after eliminating assumed revenue from future business deals.

OUTSOURCING THE RESEARCH

Pfizer said its 2012 earnings forecast hinged on a cut in its research budget to between $6.5 billion and $7 billion, from its previous target of $8 billion to $8.5 billion.

As a result, it will cut down on the number of diseases it seeks to treat and will exit the research site in Sandwich, England, where it employs 2,400 people.

It will cut one fourth of its 4,500 positions in Groton, Connecticut, although some of the affected employees will be transferred to a major company research site in Cambridge, Massachusetts.

Groton will remain Pfizer's biggest U.S. research site, but will not discover new drugs. Instead it will conduct toxicology studies and perform other drug-research functions.

Some of Pfizer's most widely used drugs were discovered by British scientists at Sandwich, including Viagra, hypertension drugs Norvasc and Cardura, and the anti-fungal Diflucan.

Morningstar analyst Damien Conover said Pfizer will cut research costs by outsourcing work to contract research organizations (CROs), as rivals like Eli Lilly (LLY) have done. Leading CROs include Covance Inc (CVD), Charles River Laboratories (CRL) and Parexel International Corp (PRXL).

Some drug industry critics have cautioned that growing numbers of drug studies by CROs take place overseas, where U.S. regulators have a scarcer presence and where patients have different genetic profiles than in North America.

For full-year 2011, Pfizer predicted earnings of $2.16 to $2.26 per share [non-GAAP], below the consensus Wall Street view of $2.30 per share. It predicted sales this year of $66 billion to $68 billion, in line with expectations of $66.8 billion.

QUARTERLY RESULTS TOP EXPECTATIONS

Pfizer also said it had earned $2.89 billion, or 36 cents per share, in the fourth quarter, compared with $767 million, or 10 cents per share, a year earlier. Excluding special items, Pfizer earned 47 cents per share, beating the analysts' average forecast of 46 cents. Quarterly revenue rose 6 percent to $17.56 billion, topping Wall Street expectations of $16.96 billion.

Global prescription drug sales rose 3 percent to $15.1 billion. Revenue in emerging markets, where the company has pinned hopes for earnings growth, rose 25 percent to $2.37 billion, versus flat sales in the third quarter.

Global fourth-quarter Lipitor sales tumbled 17 percent to $2.63 billion, hurt by cheaper generics in Canada and Spain. Viagra sales slumped 9 percent to $499 million, hurt by competition from Eli Lilly's longer-acting Cialis.‹