Pfizer’s mixed 1Q results spur M&A hopes; is Bristol-Myers a “done deal”?

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The News:

Pfizer Inc. said Tuesday (May 2, 2017) that first-quarter sales declined 2% year-over-year to $12.8 billion, missing analyst estimates of $13.1 billion, with the company highlighting one less US selling day and two fewer international selling days compared to the year-ago period. Net income in the quarter gained 3% to $3.1 billion, according to FirstWord Pharma.

@Pfizer 1st quarter sales declined 2% YOY to $12.8 bil, missing analyst estimates of $13.1 bil Click To Tweet

CEO Ian Read commented, “I was pleased with our first-quarter 2017 financial performance, which was inline with our expectations.” The CEO continued, “I believe each of our businesses is well positioned within their individual markets with strong portfolios, highly skilled and accomplished leadership and focused strategies.”

Pfizer noted that sales in its innovative health unit climbed 5% to $7.4 billion, which the drugmaker indicated was due to “continued growth from key brands including Ibrance and Eliquis.” Meanwhile, revenue in the company’s essential health segment slumped 10% to $5.4 billion.

As for individual products, quarterly sales of the Prevnar 13 vaccine franchise fell by 8% to $1.4 billion compared to the same period last year, while revenue from Lyrica jumped 12% to $1.1 billion.

Meanwhile, Ibrance sales surged 58% versus the year-ago period to $679 million, missing analyst expectations of $682 million, whereas revenue from Lipitor declined by 2% to $404 million. Sales of Viagra, however, plunged 14% versus the year-ago period to $339 million.

For the current year, Pfizer confirmed that it expects sales in the range of $52 billion to $54 billion, with earnings per share between $2.50 and $2.60, inline with prior guidance.

Commenting of the news, Goldman Sachs analysts said, “key franchises came in well below expectations, raising concerns about Pfizer’s ability to grow in the absence of M&A.”

Steve’s Take:

Forget about its oh-hum quarterly results, I’m with the crowd who wants to know if Pfizer is seriously contemplating a purchase of Bristol-Myers Squibb, as the rumors go. CEO Read hinted at the possibility on Tuesday’s first-quarter earnings call–but investors shouldn’t expect any immediate action, he cautioned, in typical Read fashion.

As Read told shareholders on the call, “we…believe we have the ability, should the opportunity arise and should the value be there, to do a large deal.”

Again, no real signal of…anything, actually.

He noted, though, that “certain large companies have significant, almost binary risks…which could immediately alter their values,” which is one reason the company won’t be rushing into anything.

Bristol-Myers, whose status in the immuno-oncology field was compromised last year by a bombed first-line immonotherapy trial in non-small cell lung cancer, certainly fits that takeover scenario, says FiercePharma. Its lung cancer hopes are now resting on a combination of PD-1 med Opdivo and a CTLA-4 drug–an approach that’s not shared by Merck’s rival Keytruda and Roche’s Tecentriq, which seeking checkpoint inhibitor/chemo pairings.

Mindful of that, swallowing Bristol-Myers wouldn’t make a lot of sense for Pfizer, “until more clarity is gained on how the battle will shake out between ‘CTLA4 combo’ and ‘chemo combo,’” Bernstein analyst Tim Anderson has written to clients, noting that “having the value of the target change materially for the worse could make management look bad.”

Bristol-Myers’ travails first stoked merger rumors early this year, and the ever-deal-seeking, but not-yet-finding, Pfizer saw its name surface as a potential buyer. One reason? Despite its partnership with Merck KGaA on avelumab–which recently picked up its first approval, a Merkel cell carcinoma nod, under the brand name Bavencio–analysts say the New York pharma goliath is not necessarily a sure bet to be a leader in the so-called second wave of immuno-oncology drugmakers.

Read, though, insisted on Tuesday that Pfizer is “committed” to the partnership and remains “focused on developing avelumab”— despite acknowledging that pulling out of the deal wouldn’t scotch a really big acquisition.

“I don’t think that any type of breakup fee would be material compared to the size of a large deal,” he said, suggesting a potential Bristol-Myers buy would eclipse walking out on Merck.

The way Goldman Sachs analyst Jami Rubin sees things, business development is all the more important in light of Pfizer’s first-quarter performance, which saw some key meds fall short of estimates. In a note to clients, she pointed in particular to Xtandi, whose $131 million in sales is “clearly weak given [Pfizer] paid $14 billion for this asset,” and Xeljanz, which came in $38 million behind consensus, writing that the misses raised “concerns about Pfizer’s ability to grow in the absence of M&A in our view.”

Pfizer, for its part, attributed part of the revenue miss to a selling period slightly shorter than last year’s, which it said took $300 million off its $12.79 billion revenue tally. And despite the time crunch, it was able to best forecasts with breast cancer-fighter Ibrance, which raked in $679 million to edge Wall Street’s $672 million prediction.

All eyes are on Ibrance now that Novartis is out with rival Kisqali, which undercut Ibrance on price.

Falling sales isn’t usually a good sign. Should Pfizer investors be concerned? Nope, says Motley Fool. The company continues to anticipate revenue between $52 billion and $54 billion, with adjusted diluted earnings per share in the range of $2.50 to $2.60.

The midpoints of those guidance ranges reflect 4% revenue growth and 10% adjusted earnings-per-share growth on an operational basis. Not stellar, but decent.

Bottom Line:

When it’s all said and done, however, the King Kong of potential M&A players may be suited up but doesn’t seem to want to get in the game for real.

On its earnings call on Tuesday (May 2, 2017), Pfizer’s Read actually sounded ill-disposed to major deals, saying policy uncertainty and the riskiness of potential targets make this a bad environment for big-game hunting.

Failed pursuits of AstraZeneca PLC and Allergan PLC haven’t altered Pfizer’s fundamental orientation toward big deals, Bloomberg notes. I’ll wager Mr. Reid’s cautionary talk actually is a smokescreen, masking a shrewd, cunning stalker, lying in wait.

Don’t expect Pfizer to stay on the sidelines much longer.

Shares of Read’s company have pretty much traded flat over the past couple of years, but I side with those who continue to believe that the company’s fundamentals are improving.

However, what investors need to take into account, Seeking Alpha reminds us, is that Pfizer has the financial levers to accelerate top line growth when it needs to be. Firstly, it appears a potential Bristol deal would be a good fit. With a current debt to equity ratio of 0.53, Pfizer’s balance sheet is well equipped to acquire large companies in this space.

Let’s wrap up with the anaysts’ consensus:

As of April 28, 2017, the consensus forecast among 22 polled investment analysts covering Pfizer advises that the company will Outperform the market. This has been the consensus forecast since the sentiment of analysts improved on Dec 03, 2008. The previous consensus forecast advised investors to Hold their position.

Recommendations 1yr ago Latest
Buy 7 4
Outperform 8 7
Hold 8 11
Underperform 0 0
Sell 0 0

1-YEAR PRICE CHANGE +0.15%

The 20 analysts offering 12 month price targets for Pfizer have a median target of $38, with a high estimate of $52 and a low estimate of $33. The median estimate represents a 13.53% increase from the last price of $33.47.

Pfizer is a great name to buy when the time, or should I say price, is right. And that would be at, or under, $30.

What’s striking is that analysts predict a possible high of $52–a 58% premium to its shares’ current price. Reaching that level anytime soon I don’t see as remotely likely, but even half that, say $42.50, would chalk up a gain of around 29%–still a stunner.

This general consensus on future share prices is disconnected from the fact that they have increased just 0.15% the past year. What turn of events could conceivably push shares upwards of nearly 60%? Maybe someone knows of a clandestine suitor?

Finally, Pfizer can’t afford to sit on the bench, waiting to get into the M&A game, for that much longer. CEO Read knows this.

Steve's Take: @Pfizer is a hold for now, and buy right at or below $30. Click To Tweet

So Hold for now, and Buy right at or below $30. That’s my thinking.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.