Pfizer Holds Up in Face of Patent Losses

 Pfizer (PFE) reported first-quarter results that largely matched our expectations, and we don't anticipate any changes to our fair value estimate. Excluding the impact of foreign exchange rates, total sales fell 1% year over year as patent losses weighed on overall growth. Earnings per share growth was flat with the prior-year period as increased share buybacks helped offset minor cost increases. Pfizer confirmed its full-year EPS guidance of $2.16-$2.26, which we expect it to meet.

Pfizer's diversified portfolio of drugs helped offset generic competition to several key drugs. In particular, the patent loss on antidepressant Effexor and international patent losses on cholesterol-lowering drug Lipitor caused close to a 5% drop in total sales for the company. Despite this hit, several of Pfizer's remaining drugs, including neuroscience drug Lyrica and vaccine Prevnar 13, posted steady growth, helping to offset the patent losses. We expect this trend to continue through 2012 as Pfizer faces several more patent losses.

While Pfizer lacks a pipeline to completely offset its significant patent cliff (Lipitor, Viagra, Xalatan, and Geodon all beginning in 2011), three key new drug launches in between 2011 and 2012--ALK inhibitor for cancer with an 85% chance of approval, JAK inhibitor for rheumatoid arthritis (55%), and apixaban for cardiovascular disease (60%)--could reshape the company's growth trajectory. We expect key data for apixaban's use in atrial fibrillation in the second quarter, and on the basis of earlier studies, we expect good results.

Cost-cutting and share repurchases are mitigating the cost impact of the loss of high-margin drugs. As a percentage of total sales, operating costs increased about 20 basis points year over year. Given the increased costs of U.S. health-care reform and the patent losses, we believe Pfizer is improving its operating structure and will hit its target of $4 billion in annual cost savings from the Wyeth acquisition by 2012. Additionally, Pfizer repurchased $2.2 billion of shares in the first quarter, reducing its share count and improving EPS growth about 1% year over year. Pfizer increased its 2011 outlook for share repurchases to $5 billion-$7 billion from $5 billion, which we believe is partly fueled by the $2.4 billion sale of the company's Capsugel business.

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