Where’s the upside?
That was the prevailing question on the minds of Wall Street analysts after Pfizer announced mixed results in its second quarter, marked by a revenue shortfall that reminded investors just how dependent the drug giant is on a few aging blockbusters. Sales of pneumonia vaccine franchise Prevnar dropped 8% year over year to $1.15 billion, falling short of the consensus estimate of $1.24 billion. Rheumatoid arthritis treatment Enbrel, which is facing biosimilar competition overseas, beat estimates but still fell 19% to $617 million.
All told, revenue in the second quarter dropped (PDF) 2% to $12.9 billion, missing the average analyst estimate of $13.1 billion. Adjusted net income did rise 3% to $4.1 billion, amounting to earnings per share of 67 cents—a penny above estimates—but analysts, understandably, were focused on the drug giant’s stagnant top line.
It’s not just Prevnar and Enbrel that have the Street worried. Pfizer is speeding towards two giant patent expirations: $1.1 billion-per-year erectile dysfunction drug Viagra comes off patent in December and pain med Lyrica, which brought in nearly $5 billion last year, is set to lose its key patents next year.
Some of the company’s newer entries are also raising concerns. Xtandi, the cancer drug Pfizer picked up in its $14 billion acquisition of Medivation, brought in sales of $141 million during the quarter, missing the consensus estimate of $158 million. Just a few days ago, Pfizer and its development partner Astellas abandoned their efforts to get the drug approved in breast cancer. Seeing as Xtandi was already facing reimbursement challenges, questions persist about whether the drug will grow into the huge valuation Pfizer placed on Medivation.
That deal did produce one pipeline hope, talazoparib, a PARP inhibitor currently in phase 3 trials to treat some patients with BRCA-positive breast cancer. But key data isn’t expected until later this year or early next year.
Pfizer CEO Ian Read is vowing that the company’s pipeline will pay off with at least 25 approvals in the next five years—15 of which could be blockbusters. And the company is constantly on the hunt for deals. During the quarter, the company struck one licensing deal with Basilea Pharmaceutica to commercialize an antifungal treatment, and another with Sangamo to develop gene therapy treatments for hemophilia A. But it’s still under pressure to do much more to turbocharge the top line.
Pfizer has recently been rumored to be weighing a buyout of Bristol-Myers Squibb—a move that would help it move into a leadership position in the red-hot market for immuno-oncology drugs. During the first-quarter conference call, Read acknowledged that Pfizer would be able to make an acquisition “should the opportunity arise and should the value be there to do a large deal.”
But during a conference call following the earnings release, Read was asked to comment on a recent major disappointment in immuno-oncology: poor results in AstraZeneca's trial combining its PD-L1 inhibitor with an anti-CTLA4 molecule. BMS, after all, is investing in a similar combination. Immunology combos, sometimes called "IO/IO," are widely considered to be the wave of the future.
The trial "certainly indicated that IO/IO may be more problematical in the near term," he said. He added that the future of PD-L1 inhibitors still looks positive, but that more data will need to be produced before the usefulness of combo treatments can be adequately assessed.
When pressured to say definitively whether or not Pfizer is backing away from big deals, however, Read insisted there's no change in strategy. He said short-term events like corporate tax reform "may change values," which argues for delaying any decisions on acquisitions. But that doesn't mean he's ruling out big deals, he said. "We will look at the circumstances and the asset prices and determine the appropriate capital allocation," he said. "Rest assured we will aggressively take the actions that we believe will improve value to shareholders."