Pfizer Remains Upbeat Despite Tough Conditions in 2007

So Far, So Good for Pfizer as 2007 Ends on High Note

At first glance, Pfizer's full-year 2007 results do not appear particularly impressive: revenues inched up by 4% in the fourth quarter and by just 1% for the full year; pharmaceutical sales actually declined by 1% for the full year and net profit plummeted by 70% in the fourth quarter and by 57% for the full year. The reason behind these somewhat disappointing numbers, however, is the unusually high comparison base in the fourth quarter and full-year 2006, when the company's results were boosted by the one-off after-tax contribution of US$7.9 billion from the sale of its Consumer Healthcare business to Johnson & Johnson (J&J; U.S.).

Despite the high comparison base, Pfizer appears to have reined in cost growth and managed to maintain its operating margin (as calculated by Global Insight) at 27% in the fourth quarter—just 0.1 percentage point lower than in the same quarter of last year. For the full year, the operating margin has declined by 8.2 percentage points to 28.1%.

Some Products Cause Concern

With the profit slump largely attributable to the one-off income boost in 2006, the main cause for concern remains the company's sluggish sales growth. Pharmaceutical revenues actually declined for the full year by 1%, despite a strong boost from favourable currency exchange rates. In the fourth quarter, revenues were positive, affected by approximately US$610 million—or five percentage points—by currency effects.

Looking at individual products, the biggest gain for the year was that Lipitor sales did not fall as much as many observers and the company itself feared. Amid intense competition from genericised simvastatin, Lipitor has held its ground, with full-year sales declining by 2% globally and 8% in the United States. To a large extent, the Lipitor decline has been prevented by intense promotion of the drug and the well-timed release of clinical studies, showing Lipitor's superiority over simvastatin. The tactic has been particularly successful in the fourth quarter, which saw Lipitor sales increase by 3% globally.

Efforts to promote Exubera, the world's first inhalable insulin, have been less successful and the company eventually decided to end marketing the product. The Exubera exit has cost Pfizer a US$2.8-billion charge in the fourth quarter, but in retrospect the decision to cut its losses and move on appears justified. Another setback has been the early loss of patent protection for Norvasc in March. Generic competition contributed to a US$667-million decrease in Norvasc revenue. Smoking cessation drug Chantix/Champix (varenicline) and nerve pain drug Lyrica (pregabalin) continue to provide the brightest spots in the portfolio, with worldwide full-year sales growth of 773% and 58%, respectively. Cancer drug Sutent (sunitinib maleate) has also provided spectacular growth (177% worldwide for the full year); this is growth that Pfizer needs in anticipation of the exclusivity expiry of cancer treatment Camptosar (irinotecan) next month. Pfizer is also terminating sales of prescription Zyrtec (cetirizine), which contributed US$1.5 billion to sales last year. Under the terms of its 2006 agreement with J&J, Pfizer will stop marketing the prescription version of the allergy drug once J&J receives approval to sell the drug over the counter (OTC).

Outlook and Implications

Despite the challenges of the past year, Pfizer has presented an encouraging guidance for 2008. Achieving its targets depends on the company's ability to achieve the cost savings set in CEO Jeff Kindler's ambitious plan. The company exited six manufacturing facilities in 2007, and expects to see the full benefit of that in 2008. It is in the process of exiting another 12 facilities and expects at least some of the benefit of that to be evident in 2008. In addition, as CFO Frank D'Amelio put it: "We're basically expecting to lower our sourcing costs… by establishing strategic partnerships with some lower cost vendors."

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