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Pfizer's Feeling Fine

Sales were light last quarter, but the drug giant says 2006 revenue should match a year ago.

Updated from 12:49 p.m. EDT



produced first-quarter earnings that easily beat Wall Street's predictions, but the pharmaceutical giant's sales fell below analysts' consensus estimate.

For the quarter ended March 31, Pfizer earned 61 cents a share, excluding one-time items. The consensus estimate of analysts polled by Thomson First Call was 53 cents. First-quarter revenue was $12.66 billion, compared with the average forecast of $12.94 billion and down from $13.09 billion a year ago.

Using generally accepted accounting principles, Pfizer earned $4.11 billion, or 56 cents a share, in the quarter, compared with $301 million, or 4 cents a share, for the first quarter of 2005. Last year's results included a $1.2 billion pretax charge for

suspending sales of the arthritis drug Bextra and a $2.2 billion tax charge for repatriating earnings from foreign subsidiaries.

Despite sales that were lighter than expected, Karen Katen, president of Pfizer's human health operations, said the quarter's results "mark the beginning of a year that will be characterized by the transition to the next-generation Pfizer." In late afternoon, trading, Pfizer's stock was up 3 cents to $24.96.

The company said it was keeping its full-year earnings prediction of $2.00 a share, excluding special items. First Call's average estimate is $2.01. After accounting for all items, the company is expecting a profit of $1.56 to $1.60.

David Shedlarz, a vice chairman, reaffirmed the company's outlook that average annual growth in earnings per share, excluding special items, will be in the "high single digits" for 2007 and 2008.

"We continue to expect 2006 revenues to be comparable to those in 2005," he added, with longtime products and new drugs "substantially replacing" sales lost from products whose patents have ended or will expire. Last year's revenue was $51.3 billion.

The biggest generic-drug impact will affect the antibiotic Zithromax, whose U.S. patent ran out late last year, and the antidepressant Zoloft, which loses patent protection at the end of the second quarter.

For the first quarter, Zithromax's worldwide sales plunged 69% from last year to $250 million. U.S. sales dropped 80%. Zoloft is Pfizer's third-biggest drug. First-quarter sales of $779 million were down 8% from the same period last year, with the foreign-market component falling 48%.

Analysts continue to debate the impact of generic competition on Lipitor, the cholesterol-fighter that is Pfizer's biggest product. Lipitor's patent is secure, but its biggest competitor, Zocor, from



, loses patent protection in June. Managed-care firms have been trying to persuade patients to switch to a generic version of Zocor and to convince doctors to start new patients on generics rather than Lipitor.

Lipitor's sales growth has been slowing in recent months. During the first quarter, sales rose only 1% year over year, to $3.11 billion. Without unfavorable foreign-exchange rates, the sales gain would have been 3%.

"We are committed in our efforts to reach our full-year revenue goal for Lipitor, although it is an aggressive target given a challenging environment and a slower-than-hoped-for start to the year," said Hank McKinnell, Pfizer's chairman and CEO.

McKinnell told analysts during a telephone conference that he still thinks this year's Lipitor sales will exceed $13 billion because of new clinical data, more promotional campaigns for the drug and efforts to convince managed-care firms to keep Lipitor as a preferred offering in their cholesterol treatment lineups.

"We're on the offense here," said McKinnell, adding that he believes Lipitor sales will benefit from an expansion of the overall cholesterol-treatment market. Last year, Lipitor produced $12.2 billion in sales.

Although analysts appeared generally pleased with Pfizer's first quarter, the Lipitor situation still makes them nervous. "We continue to believe that investors should stay on the sidelines due to the upcoming Zocor expiry," Andrew Oh of Leerink Swann wrote in a research note.

Expiring patents on big drugs and "an expected lack of new blockbusters to offset these lost sales" prompts Oh to keep a market-perform rating on the stock, along with a belief that sales and earnings growth will be "meager" through 2009. He doesn't own shares. His firm has had a non-investment-banking relationship with Pfizer.

Barbara Ryan of Deutsche Bank Securities told clients that she remains bullish. The marketing of four new drugs "could enhance sentiment ... and improve the company's growth prospects," she says. The drugs include Exubera, an inhaled insulin recently approved by the Food and Drug Administration, and the kidney cancer and stomach cancer drug Sutent, which recently reached the market.

The other two products are the experimental drugs Champix, for smoking cessation, and Indiplon, for insomnia. The FDA could act on both drugs next month.

With a strong balance sheet, a 3.9% dividend and $36 billion in funds repatriated from foreign subsidiaries, Pfizer has limited downside risk to its shares, Ryan says. At worst, she believes, the stock could fall to $24, while her 12-month target is $33. She doesn't own shares, but her firm has had a recent investment-banking relationship with the company.

McKinnell didn't provide any update on when Exubera would reach the U.S. market, other than to repeat his previous comment that it would be available mid-year. He didn't discuss a price.

McKinnell added that he was disappointed by a recommendation by an independent British health care organization that the country's National Health Service not pay for Exubera. The organization says the drug will cost more than injectable insulin but won't provide additional benefits. The European Union has approved Exubera.

Last week, Pfizer's London subsidiary said the recommendation "appears perverse and short-sighted." Pfizer opposes the opinion by the National Institute for Health and Clinical Excellence, or NICE, and it will seek to reverse it, company officials said Wednesday. Calling the NICE ruling "preliminary," they predicted the recommendation would be overturned after a British government review taking about six months.

Pfizer continues to invest in its own shares, buying back $1 billion worth of stock in the first quarter. The company plans to buy another $1 billion in the second quarter, on its way to an expected $4 billion outlay for the entire year. That would be a giant number for most companies, but it's only about 2% of Pfizer's market capitalization.

Shedlarz added that the company's verdict on its consumer-products division, due in the third quarter, "may afford still further share-purchase opportunities." He said interest in the unit remains high, and that the company is still contemplating whether to sell the division or spin it off.

Pfizer announced in February that it was

investigating options for the division that makes products like Listerine. Pfizer has said it would prefer to act on the whole division rather than deal with products on a piecemeal basis. If it decides to sell the unit, the price will be higher than a spin-off, because the latter transaction offers certain tax advantages to shareholders.