Rebounding from last week's cryptic announcement lowering its 2004 revenue guidance, Pfizer, the world's largest pharmaceutical company, reported good news: strong sales for the second quarter, a growing pipeline, and successful new product launches and filings with the FDA.

It's a loud sigh of relief in a tense global market. Facing increased competition for many of its flagship drugs, Pfizer managed to stave off rival versions of its blockbuster products and maintain dominance.

Pfizer’s second quarter revenues were $12.3 billion, a 24 percent increase from the same quarter last year, with a net income of $2.86 billion and diluted earnings of $0.38 per share. The New York City-based company reaffirmed its 2004 earnings estimate of $16.3 billion and earnings-per-share of $2.13.

Pfizer’s human pharmaceuticals division reported revenues of $10.7 billion, also up 24 percent, and similar double-digit growth in its consumer healthcare and animal health division. Sales for the cholesterol-lowering drug Lipitor, the world’s best selling drug, jumped 17 percent to $2.36 billion, accounting for 19 percent of the company’s total revenues.

“From a revenue perspective, they did better than expected for the quarter,” says Albert Rauch, an analyst with A.G. Edwards. “A lot of the worries people had when they pre-announced didn’t follow through.”

Wall Street waited anxiously to hear Pfizer’s second quarter results, after a somewhat cryptic July 16 announcement, lowering full-year 2004 estimates by between $1 and $1.5 billion, down from its previous guidance of $54 billion. The company refused to elaborate until the earnings release.

Pfizer CEO and chairman Hank McKinnel and his colleagues cited a mild cold and flu season, increased competition for Viagra, its flagship erectile dysfunction drug, and less favorable foreign exchange rates as primary reasons for the lowered revenue guidance.

Wall Street wasn’t too worried about the change in expected revenues, given the company’s dominant market position and the fact that earnings estimates remained unchanged. Several of Pfizer’s blockbuster products have become household names, and 10 of its drugs have revenues exceeding $1 billion, including depression treatment Zoloft, Celebrex for arthritis, Viagra, and Diflucan for yeast infections.

The company has maintained an annual double-digit revenue growth rate in recent years while the rest of the industry struggled with a worldwide slowdown in prescriptions, increasing cost pressures, and growing competition from generic drug makers.

Clean edge

Three of Pfizer’s main rivals reported second quarter earnings that were more reflective of the difficulties plaguing the pharmaceutical industry in recent years.

Merck, based in Whitehouse Station, New Jersey, saw its bottom line improve this quarter, though still 1 percent lower than the same quarter last year. The company’s net income declined fell to $1.77 billion, or $0.79 per share, compared to $1.78 billion, or $0.83 per share, in the second quarter of 2003. Net sales rose 9 percent to $6 billion, while sales of Vioxx, Merck’s arthritis and pain medication, plummeted 18 percent to $653 million.

Schering-Plough, based in Kenilworth, New Jersey, posted a net loss of $65 million for the quarter, compared to a net income of $182 million for the same period last year. Net sales for the quarter fell 7 percent from the same quarter last year, from $2.3 billion to $2.1 billion, and prescription pharmaceutical sales dropped 12 percent to $1.6 billion for the quarter. Sales tumbled for half of the company’s prescription drugs, including allergy treatment Claritin, hepatitis C drug Rebetol, and Nasonex nasal spray.

Madison, New Jersey-based Wyeth also released second quarter earnings today, reporting a 4 percent drop in profits compared to last year. Wyeth had a net income of $827.3 million, or $0.62 per share, compared to $864.4 million for the second quarter of last year, or $0.65 per share. Although worldwide revenues increased by 13 percent to $4.2 billion, Wyeth executives blamed high R&D costs, up 17 percent, for the dip in profits.

The stock market reacted to the companies’ earnings reports, with Pfizer’s stock down 1 percent to $32.00 at the close of the trading day, and Schering-Plough up 1 percent at $19.00 on the New York Stock Exchange. Merck’s closed down 0.5 percent at $44.59, and Wyeth shares ended the day up 1.28 percent at $34.70.

Wind in their sales

Though the troubles for big pharma aren’t expected to ease up anytime soon, analysts remain confident Pfizer can easily weather the storm. They point to Pfizer’s unequaled pipeline, with nine potential blockbusters over the next three years, which could add as much as $8 billion to their revenue by 2008, according to a recent report by UBS.

During the second quarter, Pfizer launched two new drugs: Caduet, a combination of Lipitor and high blood pressure treatment Norvasc, and Spiriva for smoker’s cough. The company plans to launch Lyrica, used to treat epilepsy and neuropathic pain, later this year.  

Though Mr. McKinnel declined to give details about upcoming New Drug Application (NDA) filings, he hinted that their plans wouldn’t disappoint. “I can tell you that you’ll be pleased by the end of the year,” he told analysts.

Pfizer is expected to launch six new drugs in 2005, including Macugen for age-related macular degeneration, a leading cause of blindness, Indiplon for sleeping disorders, Exubera, an inhaled form of insulin, as well as drugs for asthma and osteoporosis.

Besides its pipeline, Pfizer also has plenty of cash to carry it through any difficult times. The company’s pockets are expected to deepen from $12 billion in 2003 to more than $75 billion in 2008, according to the report by UBS.

Trouble ahead?

Though Pfizer’s performance is unequaled in the world of big pharma, several continuing trends and new developments might test the company’s strength in the near future. Heated competition, global cost pressures, government discount programs, and possible patent expirations could negatively impact the company’s bottom line.

Analysts say that competition will only increase for many of its blockbuster drugs, especially Viagra. “For products like Viagra that are more cosmetic in nature, I think the competition will intensify,” says Sena Lund, an analyst with Cathay Financial.

Viagra sales declined by 12 percent to $201 million, losing ground to Eli Lilly’s Cialis and GlaxoSmithKline and Bayer AG’s Levitra. “We don’t expect Viagra to regain its market share going forward,” says Mr. Lund.

Viagra isn’t the only major drug to face serious competition. Merck and Schering-Plough are expected to launch their collaborative effort called Vytorin, a competitor to Lipitor, which could obtain FDA approval as early as Friday.

Seven of Pfizer’s patents are up for expiration between now and 2007, which could slice billions off of sales figures when generic versions hit the market. Diflucan expired just this month, Neurontin, a treatment for pain associated with shingles, will expire in second half of 2004, Zithromax and Zoloft patents expire in 2006, and Norvasc, Accupril, and Zyrtec will be open to generic competition in 2007.

Because these seven drugs accounted for 31 percent of Pfizer’s revenues in 2003 ($15.4 billion), UBS predicts a 67 percent decline in global sales of all products by 2008, which could translate into $10.3 billion in lost profits. But analysts also believe that Pfizer’s robust pipeline and existing blockbusters will make up for new generic competition.

Mr. McKinnel claims that the company’s patent for Neurontin will remain in place until 2017, pending litigation. If it doesn’t, “they could lose a substantial amount of revenues for that and they would not hit their numbers,” says Mr. Rauch of A.G. Edwards.

And there’s always the possibility that one or more of its drugs won’t make it through the FDA, which could be devastating to investor confidence and bottom line. Barring such an event, analysts see nothing but good news for Pfizer in the near future.

“I think Pfizer is pretty much in place for the next two to three years for a growth rate in the low double digits,” says Mr. Lund, compared to around 7 percent for the industry as a whole. “If they are vigilant enough in licensing the right products, and as far as they are one step ahead of the competition, I think they will do well.”