When Wall Street meets
executives on Wednesday to discuss the company's quarterly financial results and second-half predictions, there will be many more questions than answers.
The issues Pfizer might be able to adequately address include details on
the $4 billion cost-cutting program announced in April and how those savings will be reflected in earnings per share; information on its plans for the foreign-subsidiary earnings being repatriated for domestic use; and specifics on how the company expects to return to double-digit earnings growth in 2006.
Then there are the questions that Pfizer can't answer, namely, when a U.S. judge will rule on a patent challenge to the cholesterol drug Lipitor by the Indian generic drug company
. One patent expires in 2010 and another expires in 2011.
"The single most important sentiment driver for the stock in the second half of 2005 ... will be the Lipitor patent decision," writes Chris Shibutani of J.P. Morgan in a recent research report. The trial ended late last year,
and a decision could come this quarter, next quarter or next year.
Like most analysts, Shibutani says a Pfizer defeat is a long shot, and he has an overweight rating on the stock. "Over the next three to six months, we see more positive than negative catalysts, lest the unexpected, of course," says Shibutani, who doesn't own shares. His firm has a noninvestment banking relationship with the company, and it plans to receive or seek investment banking compensation in the next three months.
For now, analysts surveyed by Thomson First Call expect Pfizer to earn 44 cents a share in the second quarter, with revenue of $12.15 billion. For the year, the consensus profit estimate is $1.98 a share and the revenue projection is $51.56 billion.
One positive catalyst is the $36.9 billion Pfizer will repatriate under a law signed by President Bush that allows companies to bring back foreign-unit profits at a tax rate well below the traditional rate.
Henry McKinnell, Pfizer's chairman and CEO, has said the money would be used to "pursue strategic opportunities" and improve R&D efforts. Analysts say the money could be used for an assortment of incremental acquisitions, such as the recent bid for
Although the $1.9 billion price for Vicuron may be termed "incremental" only for a company as big as Pfizer -- its market capitalization is $201 billion -- the acquisition suggests the drug giant may believe that its past practice of making monster acquisitions, such as Pharmacia and Warner-Lambert, is over.
"The acquisition is consistent with our thesis that Pfizer intends to use its substantial war chest to bolster its late-stage pipeline," David Moskowitz of Friedman Billings Ramsey writes in a June 16 research report. "We believe the company will be a consolidator of high-growth drug products."
Moskowitz has an outperform rating on the stock. He doesn't own shares, but his firm says it seeks to do business with companies mentioned in research reports.
The Vicuron acquisition, which is due to close this quarter, is timely because the Food and Drug Administration is scheduled to rule in September on Vicuron's dalbavancin, an antibiotic for treating dangerous skin and soft-tissue infections. The FDA is supposed to decide by Nov. 27 on Vicuron's other big experimental product, the antifungal medication anidulafungin.
"As Pfizer faces a slow earnings outlook in 2005 and accelerating patent expirations in 2006 and 2007, the likelihood of cash-financed acquisitions may increase," says Moody's Investors Service. Last month, Moody's reaffirmed Pfizer's top-ranked credit rating of Aaa, but it also tacked on a negative outlook, saying the company must achieve an assortment of cash-flow-to-debt ratios to maintain the rating.
"Over time, if Moody's becomes more confident that the specified ratios will be readily attainable and remain sustainable, then the outlook is likely to stabilize," the firm says. If these guidelines can't be met, "the ratings are very likely to be downgraded."
Words of Caution
With their buy ratings, analysts like Shibutani and Moskowitz are in the majority. According to Thomson First Call, 17 analysts recommend buying the stock, while 10 have hold ratings. Cautious comments come from analysts like David Risinger of Merrill Lynch, who has a neutral rating and who told clients earlier this month that the stock "has only modest upside potential."
Risinger's biggest concern is Lipitor, not only over the Ranbaxy challenge but also when
cholesterol drug Zocor loses U.S patent protection in mid-2006. The barrage of generic versions of Zocor, as well as generic versions of
Pravachol, which loses U.S. patent protection next year, could play havoc with Lipitor's sales.
Risinger also wonders if management still believes the Cox-2 franchise will grow beginning in late 2005.
Cox-2 inhibitors are arthritis treatments/pain relievers such as Celebrex and Bextra from Pfizer, and Vioxx from Merck. Vioxx was pulled from the market in September and Bextra's sales were suspended in April for concerns over side effects.
Celebrex remains on the market, although the FDA wants stronger warning labels on this product and other pain relievers. Risinger doesn't own shares, while his firm has an investment banking relationship with Pfizer.
Although Pfizer has a strong balance sheet, analyst George Grofik of Citigroup Smith Barney is worried about the revenue damage from generic competition during the next few years. His concerns are not only for the known product patent expirations but also for the feared patent challenges to Lipitor and to Celebrex.
Grofik, who has a hold rating, paints a worst-case scenario in which nearly 46% of Pfizer's prescription drug sales could be at risk to generics over the next four years. He owns shares of the company, and his firm is a market maker in the stock.