Pfizer's Quarter Is Soft

Updated from 9:26 a.m. EST

Pfizer's ( PFE) fourth-quarter earnings more than quadrupled from a year ago, lifted by a 7% revenue increase and fewer charges in the latest quarter. The company stood by its embattled Celebrex and Bextra treatments, both of which saw sales rise sharply in the quarter.

The financial results, however, didn't persuade investors, as the stock slipped 31 cents, or 1.2%, to $24.99. That's $3 off the company's 52-week low. No doubt, investors were discouraged by executives' comments that Pfizer would not provide guidance for 2005 until April 5.

The absence of guidance extends to Celebrex and Bextra, whose sales, analysts say, are expected to decline significantly this year. Hank McKinnell, the chairman and CEO, said Pfizer needed at least another month's worth of data on prescription trends to get a better feel for how the year will proceed. Estimating the drugs' prospects also depends on a decision by the Food and Drug Administration on the suitability of these drugs and other arthritis drugs known as COX-2 inhibitors.

An FDA advisory committee is scheduled to meet for three days in mid-February to review the safety profiles of these products. European regulators also are meeting to determine under what circumstances these drugs should be sold. "Good science will prevail," said Karen Katen, executive vice president, who also leads Pfizer Global Pharmaceuticals.

Reviewing The Numbers

Pfizer earned $2.83 billion, or 38 cents a share, in the three months ended Dec. 31, up from $602 million, or 8 cents a share, last year. Excluding numerous items including $831 million in acquisition accounting and another $323 million in merger costs, the company said operating earnings rose 16% from a year ago to $4.39 billion, or 58 cents a share, in the quarter.

Revenue rose 7% to $14.92 billion, reflecting, among other things, a 23% year-over-year jump in Lipitor revenue to $3.26 billion, a 24% jump in Celebrex sales to $1.01 billion, and a 57% jump in Bextra sales to $417 million. Analysts had been expecting earnings of $4.43 billion, or 59 cents a share, on sales of $14.1 billion in the quarter. These expectations excluded one-time items.

Pfizer's adjusted EPS of 58 cents represented the first quarter in at least the last nine quarterly reporting periods in which Pfizer has failed to beat or match the consensus, according to Thomson First Call.

For the full fiscal year, Pfizer reported adjusted earnings of $16.14 billion, or $2.12 a share, on revenue of $52.52 billion. The adjusted earnings figure excludes one-time items.

Although the EPS figure fell within the company's guidance of $2.12 to $2.14 a share, it was one penny below the consensus view of analysts tracked by Thomson First Call.

On a GAAP basis, the company earned $11.36 billion, or $1.49 a share, for the fiscal year.

"While Pfizer's revenue and income growth will likely be tempered in the near term due to patent expirations and other factors, the company will continue to make the investments necessary to sustain strong longer-term growth, the prospects for which remain excellent," said David Shedlarz, the chief financial officer.

Analysts say the next three years could be difficult for Pfizer. The consensus EPS for those years are $2.13, $2.23 and $2.33, according to Thomson First Call.

"These are challenging times for our company and our industry, and the years 2005-2007 represent a critical period for Pfizer," said McKinnell.

The company continued to trumpet a drug pipeline that will see 20 major U.S. regulatory filings between 2001 and 2006 but also conceded that older drugs are running out of time.

For example, worldwide sales of the epilepsy drug Neurontin dropped 39% to $481 million in the fourth quarter compared to the same period in 2003 due to generic competition. Fourth-quarter sales of the antifungal Diflucan fell 56% to $139 million, including a 99% drop in the U.S. market to $1 million.

And although it still has patent protection, Viagra continues to be hit by competing products and a slow-growing market for erectile dysfunction treatments. Sales for the fourth quarter slipped 8% worldwide to $469 million, including an 18% decline in the U.S. market to $248 million.

Pain Relief?

Regarding Celebrex and Bextra, two painkillers whose safety has come into question, the company provided few new answers to analysts' questions during a Wednesday teleconference, as Katen said Pfizer would continue "doing what's best for patients" until the FDA gives clearer direction on the COX-2 drugs.

Last month, the FDA told doctors to be more conservative in prescribing these drugs, which, like Merck's ( MRK) Vioxx, are COX-2 inhibitors. Merck withdrew Vioxx from the market on Sept. 30, prompting a temporary boost to sales of Bextra and Celebrex.

"In the interim, we believe that physicians should follow FDA guidance issued in late December and evaluate all available information on selective COX-2 inhibitors as well as both OTC and prescription non-selective non-steroidal anti-inflammatory drugs, when selecting arthritis and pain therapies for their patients in need," Pfizer said.

The company said publicity surrounding the safety issues "contributed to a decline of the overall anti-inflammatory market in the U.S." last quarter.

Despite the gains in sales for both Bextra and Celebrex, analysts believe both drugs hit their peak in 2004. A recent Citigroup Smith Barney report predicted Celebrex's sales could be cut in half -- from $3.3 billion in 2004 to $1.62 billion this year. The firm said Bextra's sales would experience a similar beating -- from $1.29 billion last year to $623 million in 2005.

Pfizer also provided an overview of legal action relating to Celebrex and Bextra, although it didn't cite a specific number of lawsuits. Product-liability suits have been filed as early as 2001 for Celebrex. Additional suits were filed in late 2004 and early 2005.

Pfizer said some suits have been filed in the U.S. and Canada, alleging false advertising and "withholding the alleged safety risks" of Bextra and Celebrex. "As previously reported, we received requests for information and documents from the U.S. Department of Justice and a group of state attorneys general" about the marketing of the two drugs, Pfizer said. "The agencies have also recently sought information and documents relating to the safety of both products."

The company added that it is the defendant in "a number of actions" charging that Pfizer, its managers and directors violated federal securities laws by allegedly misrepresenting the safety of Celebrex and Bextra.

A Taxing Question

One crucial upcoming financial decision is what to do with earnings from Pfizer's foreign subsidiaries. A law signed last year by President George W. Bush allows companies to repatriate these earnings for domestic use at a tax rate of 5.25% rather than the traditional 35%. "Management is now investigating whether the company might repatriate up to $29 billion in extraordinary dividends during 2005 subject to management and board approval," Shedlarz.

He added that Pfizer could gain an extra $8.6 billion in repatriated earnings based on the historical accumulated earnings of Pharmacia, which Pfizer acquired in 2003. However, Shedlarz said the company needs further guidance from the Treasury Department on that issue and other matters relating to the repatriation law.

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