Pharmaceutical giant Pfizer (NYSE: PFE) announced fourth quarter results that missed expectations.

Revenue came in at $12.69 billion, a bit shy of the consensus of $12.73 billion. The revenue figure marked a year-over-year decline of 9%.

The results were driven by a 32% decrease in revenue from the company’s generic drug division Upjohn. Upjohn revenues were hammered by the emergence of generic competitors of fibromyalgia drug Lyrica. This was partially offset by 7% growth from the Biopharma unit led by the blood clot medicine Eliquis.

Earnings per share of $0.55 missed the consensus estimate of $0.58 by 5%. The company reported EPS of $0.63 in the same quarter of last year so profits were 13% lower this year. Full-year EPS increased 1% in 2019.

The shortfall ended the drugmaker’s streak of positive earnings surprises at 11 quarters.

Full-year revenues fell 4% to $51.75 billion compared to 2% growth in 2018 over 2017. Pfizer has been challenged by increasing pressure from generic product alternatives and government-led pricing pressures.

The large cap pharmaceutical industry has produced modest growth over the past year that has lagged the broader market. Pfizer’s results are consistent with a group that is experiencing positive but not spectacular sales and profit growth.

Pfizer’s price-to-sales multiple has been increasing in recent months despite a pattern of slowing sales growth.


Market Likely to Shrug Off Results, Focus on Upjohn Spin-off

The market is likely to have a rather muted response to the numbers. Investors will instead be largely focused on management commentary around the company’s upcoming spin-off of Upjohn.

Pfizer will be spinning off its off-patent business which sells older drugs primarily to customers in emerging market countries. Upjohn will then be merging with Mylan (NASDAQ: MYL) with the combined entity to be named Viatris.

The new, lighter version of Pfizer is expected to be more nimble and capitalize on growth opportunities around its newer products and pipeline.

It is currently in a phase three trial of Ibrance as a treatment for early stage breast cancer. Positive data from this study could provide a boost to the stock.

There are also several gene therapies under development for diseases such as hemophilia and Duchenne muscular dystrophy that could drive growth.


Guidance for ‘New Pfizer’ Suggests Modest Growth

Management offered full-year 2020 guidance for the New Pfizer as well as forecasts for Upjohn and two parts combined.

Total company revenue is expected to be $48.5 – $50.5 billion, which at the midpoint represents a slowdown of 4%. Earnings per share assuming a full-year contribution from Upjohn and no stock buybacks is forecast to be $2.82 to $2.92 which would at the midpoint suggest a 3% profit decline from 2019.

Guidance for the New Pfizer includes revenues of $40.7 – $42.3 billion and EPS of $2.25 to $2.35. Investors will be most interested in results at New Pfizer as the new benchmark going forward.

The company’s capital allocation policy will be of particular interest to shareholders. Pfizer has increased its dividend in each of the last 10 years. It offers a 3.6% dividend yield that is well above the industry average of 2.6%.

Pfizer stock is up 2% so far this year while the pharmaceutical industry is up 1%. This compares to a 1% advance in the S&P 500 index.

Although Pfizer is a steady, income-oriented stock suitable for a value investor, its growth metrics are underwhelming. Shedding the Upjohn business should lend way to above-industry growth, but this is still likely to remain in the high single digits.

We prefer to invest in higher growth opportunities such as those available in the technology sector.


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