Cost Cuts Fuel Pfizer

The fourth quarter beats estimates as investors await Feb. 10.
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Updated from 11:53 a.m. EST

Pfizer

(PFE) - Get Report

capped a grim, tumultuous year with a pleasant surprise for investors -- a fourth-quarter earnings report that exceeded Wall Street's expectations.

However, the company also issued cryptic comments Thursday about its expectations for 2006, details for which will be released Feb. 10.

"While we are pleased that Pfizer's performance in 2005 exceeded previous expectations, investors should be aware that the factors driving Pfizer's performance may differ materially in 2006," said Hank McKinnell, chairman and CEO, in a prepared statement.

In October, Pfizer

withdrew its earnings predictions for 2006 and 2007 citing "current and anticipated business conditions."

"2005 will be seen as a pivotal year in Pfizer's history -- the last year of the old Pfizer," McKinnell added. "We are once again doing what every generation of Pfizer colleagues has had to do since the late 1800s -- change our company to meet changing times."

The New York-based drugmaker said it made $2.73 billion, or 37 cents a share, for the quarter ended Dec. 31, down from the year-ago $2.83 billion, or 38 cents a share. But on a so-called adjusted basis, which excludes significant one-time items, discontinued operations, merger-related costs and certain accounting changes, fourth-quarter earnings were 51 cents a share. That figure beat the consensus estimate of 42 cents compiled by Thomson First Call.

Revenue fell 9% from a year ago to $13.6 billion but exceeded the $13.2 billion Thomson estimate.

By mid-afternoon, Pfizer's stock had gained $1.01, or 4.2%, to $25.10 on greater-than average-trading.

Pfizer produced a "solid and reassuring outperformance," Chris Shibutani of JP Morgan wrote in a research report after the company's earnings. In maintaining an overweight rating, Shibutani says McKinnell's comments suggest there will be some "significant strategic steps" during the Feb. 10 announcement.

Shibutani doesn't own shares, but his firm has had recent investment banking and noninvestment banking relationships with Pfizer.

"The outlook for earnings per share growth for Pfizer is similar to many of its industry peers, while its balance sheet and dividend yield are clearly superior," adds Barbara Ryan of Deutsche Bank, who reaffirmed her buy rating after the quarterly report.

Her research note to clients says she expects the Feb. 10 meeting to produce "a more realistic EPS plan" along with greater clarity on how Pfizer expects to increase its earnings. She doesn't own shares, but her firm has had a noninvestment banking relationship with the company.

For the full year, Pfizer earned $8.1 billion, or $1.09 a share, when calculated according to generally accepted accounting principles. Revenue totaled $51.3 billion. For 2004, Pfizer's GAAP results included a profit of $11.36 billion, or $1.49 a share, on revenue of $52.52 billion.

Excluding one-time items, Pfizer had been predicting a full-year EPS of $1.92 to $1.94, since it lowered expectations in October from $1.98 a share. Analysts had been looking for $1.93 before items, but Pfizer turned in an adjusted profit of $2.02 for the year.

"Pfizer's earnings performance in the fourth quarter reflected operational flexibility, exceeding the estimate we announced in October 2005 for a number of reasons," said Alan Levin, senior vice president and chief financial officer of the company.

For example, Pfizer benefited from a two-week delay in U.S. generic competition for Zithromax, the antibiotic that lost patent protection in early November. The company said Lyrica, for nerve pain and epilepsy, produced strong early results, and drug sales were better than expected in Germany and Japan.

Meanwhile, several big products exceeded expectations. In addition, Pfizer said its expense-reduction program produced $800 million in cost savings, or double the goal for 2005.

Pfizer's biggest product, the cholesterol drug Lipitor, continued to grow at a slower rate. During the fourth quarter, worldwide sales rose 3% to $3.36 billion vs. the same period last year.

For the full year, Lipitor's sales rose 12% to $12.19 billion. Between 2003 and 2004, Lipitor's worldwide sales gained 18%. Between the fourth quarter of 2003 and the fourth quarter of 2004, Lipitor's sales rose 23%.

Lipitor's 2006 performance will be affected not only by brand-name competitors but also by generic substitution for two big products, Pravachol from

Bristol-Myers Squibb

(BMY) - Get Report

and Zocor from

Merck

(MRK) - Get Report

. Both drugs will lose U.S. patent protection during the first half of 2006.

Analysts expect Lipitor sales to be affected as managed-care firms encourage customers to seek cheaper generic alternatives. The big question is how strong the substitution will be.

Worldwide full-year Viagra sales declined 2%. U.S. sales fell 10% but foreign sales gained 7%. During the fourth quarter, worldwide Viagra sales dropped 8% from the comparable period in 2004, reflecting slower growth in the overall erectile-dysfunction market and competition from other products.

The loss of U.S. patent protection for several key products, the uncertainty over the arthritis drug Celebrex, and the

suspending of sales of the arthritis drug Bextra all served to depress total revenue. Last year's worldwide sales of Celebrex dropped 48% to $1.73 billion vs. 2004. Bextra produced $1.29 billion in 2004, but the cost of suspending the drug actually caused a loss of $61 million in 2005.

Among other major products, 2005 worldwide sales of the blood pressure drug Norvasc were up 5% to $4.71 billion vs. 2004. Sales of the antidepressant Zoloft slipped 3% to $3.26 billion, and revenue from the cancer drug Camptosar jumped 64% to $910 million.

Generic competition took its toll on former star performers such as the epilepsy drug Neurontin, whose sales were down 77% to $639 million in 2005 vs. the previous year. The antifungal drug Diflucan saw its sales slide 47% to $498 million, and revenue from the Accupril/Accuretic blood pressure drugs was down 56% to $294 million.