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Pfizer's quarter could mark a comeback

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Pfizer Inc. may have turned around Wall Street's negative sentiment toward its pharmaceutical fortunes with one good quarter.

Pfizer's second-quarter profit increase of 9.5 percent, announced last week, gave even skeptical analysts pause to think the company, battered by scandals and spectacular drug failures over the past decade and facing the loss of some of its top-selling medications in the next few years, has finally started to turn things around.

"What surprised me was how fast the sentiment changed," said Les Funtleyder, health care analyst for Miller Tabak & Co. in New York City. "Of course, the Street was so negative, almost anything would have been an improvement."

Funtleyder said what most surprised him about Pfizer's second-quarter earnings was its 58 percent growth in topline revenues that totaled $17.3 billion, thanks partly to the diversification wrought by its merger last year with Wyeth Pharmaceuticals. Specific areas of growth revolved around the legacy Wyeth drug Prevnar, a childhood vaccine, as well as pain reliever Lyrica, a well-established Pfizer medication that saw a 21 percent increase in sales compared with a year ago.

Even blockbuster cholesterol treatment Lipitor, scheduled to go off patent in little over a year, recorded a 5 percent increase in sales, according to figures provided by the company.

Linda Bannister, a drug-firm analyst with Edward Jones in St. Louis, said Pfizer's improved outlook shows the company's integration of Wyeth, which it purchased last October for $67 billion, is going well.

"It was a solid quarter," Bannister said. "I think we have the sense we're headed in the right direction."

She added that an announced plan to recommend a dividend increase to Pfizer's board this year brought hopes of an increase anywhere from 10 to 15 percent over the current quarterly payout of 18 cents a share. That would ease the dividend - currently yielding only about 4.6 percent - ever closer to the 6-percent level that is typical of the industry these days, and which Pfizer easily surpassed until cutting the payout in half last year to help fund the Wyeth deal.

Bannister said Pfizer's purchase of Wyeth has allowed it to "take costs out of the business" by finding synergies between the two companies and reducing redundant workers. Hundreds of these workers are research-and-development scientists for Pfizer, whose largest laboratories worldwide are in Groton.

But, while Funtleyder expects Pfizer to continue reducing its R&D workforce, Bannister said she doesn't believe the absolute spending levels for research will necessarily come down or that the company would turn to more contract research organizations, or CROs.

"There are (other) ways to become more efficient," she said. "Working smarter versus more is what we're going to see."

Neither Funtleyder nor Bannister had an easy explanation for why Pfizer's numbers last quarter took a sudden favorable turn after a year and a half of decay, especially since the increases weren't related to any new blockbuster medicines.

"Pfizer is a financial engineering story," Funtleyder said in a note to investors last week. Part of its improvement, then, occurred because the company "controlled costs better than we had thought," he said.

Bannister allowed that the company's numbers could be improving because of a restructuring last year that divided the company into a number of entrepreneurial business units, each empowered with its own budgets and decision-making authority. It could be that Pfizer's efforts to streamline bureaucracy and cut inefficient parts of its workforce also could be paying dividends, she suggested.

One striking fact - that drug revenues continued to grow even as Pfizer made large cuts in its sales force - led Bannister to question the productivity of having such a large contingent in the first place. It's a question that could easily be asked of research as well, she added.

"We just look for continued cost cutting," she said. "We'd be happy to see a replay of the second quarter."

Funtleyder said it will take at least another quarter of similar good news to determine whether Pfizer is finally coming out of its funk.

"There's a reason for optimism where there was none," Funtleyder said. "There was a negative trend, and this is at least a break in that trend. ... Is this the turning point? Only time will tell."

Pfizer's top 10 legacy drugs:

Q2 2010 Q2 2009 Change

1. Lipitor $2.81B $2.69B + 5%

2. Lyrica $762M $629M + 21%

3. Celebrex $604M $548M + 10%

4. Viagra $491M $423M + 16%

5. Xalatan $449M $395M + 14%

6. Norvasc $422M $518M - 23%

7. Zyvox $299M $257M + 16%

8. Detrol $260M $273M - 5%

9. Sutent $255M $223M + 14%

10. Geodon $247M $231M + 7%

SOURCE: Pfizer Inc.


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