One Pill Makes You Stronger: Pfizer Earnings Are the "White Knight"

"One pill makes you stronger, and the other makes you small." -"White Knight", Jefferson Airplane With Pfizer's earnings, you are looking for the pills to make you significantly stronger, with shares are up around 2% amidst a broadly weaker market today. Pfizer PFE, the New York-based pharmaceutical company, reported third quarter earnings this morning that handily beat Wall Street analysts. The company reported third quarter earnings of 62 cents per share on $17.2 billion in revenues. That handily beat Wall Street forecasts. Wall Street was looking for earnings of 55 cents per share on $16.42 billion in revenues. In addition, the company also raised guidance. It said it now sees 2011 earnings of $2.24-$2.29 per share. It had previously seen full year earnings of $2.16-$2.26 per share for fiscal 2011. Wall Street analysts expect full year earnings of $2.25 per share. Ian Read, President and Chief Executive Officer, said in the press release, "Overall, I am very pleased with our financial performance despite the impact of product losses of exclusivity totaling approximately $950 million this quarter and the challenges posed by current global market and economic conditions. Excluding the impact of product losses of exclusivity, all of our businesses generated revenue growth while effectively managing their cost structures. Notably, in our Emerging Markets business, I am pleased that both our innovative and established product portfolios continued to perform well, largely as a result of our targeted investments despite a volatile environment. Further, in Japan, our second largest market, we generated 19% operational growth enterprise-wide. I am also happy with the strong performance of the Lipitor franchise and our ability to continue to maximize the value of this brand prior to its loss of exclusivity in the U.S. We remain well prepared for the Lipitor U.S. loss of exclusivity later this month and in various other countries shortly thereafter." Read also mentioned the possibility of an over the counter version of Lipitor, which is one of the main drivers of revenue for Pfizer. The cholesterol drug accounted for $2.602 billion in revenues in the third quarter of 2011, and is by far the largest drug in the Biopharmaceutical segment of Pfizer. As Lipitor loses patent exclusivity in the U.S. next month, this has been a major concern for investors. It has lost exclusivity elsewhere in the world, and with the U.S. towards the top in obesity and high cholesterol, the possibility for an over the counter Lipitor does help to relieve some of investors' worries. Other areas of excitement however, are sales of Prevnar and Enbrel. Prevnar, which is a pneumonia vaccine, rose 37% year over year to have sales of $1.01 billion, the company's second best selling product this quarter. The drug is used for infants and children, and Pfizer wants U.S. approval to treat adults age 50 and over. Enbrel, which is an injectable medicine to treat arthritis, rose 20% to $957 million during the quarter. Also of note was Lyrica, which jumped 27 % year over year to $961 million. Read went on to talk about some shareholder friendly items occurring in the not too distant future. He said that he sees the potential for a higher dividend after the December meeting. Shares yield 4.15% based on Monday's market close, sharply higher than the yield on the 10 Year U.S. Treasury. The company also said that it will buy back $7-$9 billion worth of stock this year. As the company divests its non core businesses (animal health and nutrition units), has an improving research and development, and has the potential to raise its dividend, Pfizer shares are looking increasingly attractive in a volatile market. Shares are also potentially undervalued on a going forward basis, trading at less than 9 times expected 2012 earnings. One pill to make you stronger, and one stock to make your portfolio stronger. That might just be Pfizer. ACTION ITEMS:

Bullish:
Traders who believe that Pfizer's Lipitor will not drop off sharply in sales once it loses patent protection, and that Pfizer will be able to replace it might want to consider the following trades:

• Pfizer, Merck MRK, and other pharmaceutical companies are worried about generic drug makers. If the fears prove to be overblown, they could gain sharply in value in 2012.

• If the economy slows into a recession, these names will outperform the broader markets, based on both slow but predictable growth and outsized dividends.

Bearish:
Traders who believe that Pfizer really has to worry about Lipitor may consider alternate positions:

• Lipitor accounted for one seventh of Liptitor's quarterly revenues. That is a lot to worry about. If Lipitor, which loses patent protection next month, can not compete with other generics, the low valuations might be too high at this point.
  
  

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