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Market Update

Pfizer Posts In-Line 4Q as Generic Lipitor Weighs

We expect the top-line declines seen in the quarter to continue throughout 2012 as patent losses on several blockbuster drugs take their toll.

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 Pfizer (PFE) reported fourth-quarter results that largely matched our expectations, and we don't expect any changes to our fair value estimate. In the quarter, total sales decreased operationally 5% year over year as patent expirations on several drugs including cholesterol-lowering drug Lipitor weighed on growth. However, Pfizer posted 6% earnings per share growth, helped by share repurchases and cost cutting. The company fine-tuned its 2012 EPS guidance to $2.20-$2.30 from $2.25-$2.35, largely because of the impact of foreign exchange rates. We expect it will meet this guidance.

We expect the top-line declines seen in the quarter to continue throughout 2012 as patent losses on several blockbuster drugs take their toll. Outside the recent patent loss on Lipitor, the 2012 patent loss on antipsychotic Geodon in 2012 will also weigh on near-term growth. Further, several other key drugs that lost patent protection in 2011 will continue to depress 2012 growth. Pfizer is adapting to the patent losses by greatly improving its pipeline and aggressively cutting costs.

While Pfizer lacks a pipeline to completely offset the patent losses in the near term, three new drug launches between 2011 and 2012 could reshape its growth trajectory, including Xalkori for cancer, tofacitinib for rheumatoid arthritis, and Eliquis for atrial fibrillation. We are particularity optimistic about Eliquis as the drug recently received a priority review from the Food and Drug Administration despite other drugs already approved for atrial fibrillation. We project an 80% chance of approval for the drug and close to $3 billion in peak sales. However, Pfizer shares the profits of the drug with Bristol-Myers BMY, which lowers the drug's contribution to Pfizer.

Pfizer continues to aggressively cut expenses. As a percentage of total sales, operating costs fell more than 400 basis points from the prior-year period. We expect this trend to continue into 2012. Further, we believe the company remains on track to achieve its goal of cutting $4 billion annually in 2012.

Lastly, regarding the divestitures of the animal health and nutritional segments, we expect Pfizer to finalize its plans later in 2012. We value the animal health and nutritional businesses at $11 billion and $7 billion, respectively. We expect several suitors for both business lines, but also see a spin-off or split-off as potentially more likely to avoid the tax consequences of selling the units. We estimate a 7% increase in 2012 EPS if proceeds went toward buybacks.

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Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.