Pfizer Inc. has not started off 2013 in a strong position with first quarter earnings that disappointed analysts and investors. The world’s largest pharmaceutical company is still pondering how best to structure its massive business as it continues to show signs of wear from generic competition.

The New York-based pharma reported a 9% decline in revenues in the first quarter to $13.5 billion; the operational loss is largely attributed to the 55% drop in Lipitor (atorvastatin) sales to $626 million from $1.3 billion in the year-prior quarter. The blockbuster cholesterol drug lost exclusivity in the second quarter of 2012. Revenues failed to reach analysts’ expectations of $14 billion. Earnings also fell short, coming in at 54 cents when one-time items were excluded – missing analysts’ projections by a penny. The company blamed the poor quarterly results on foreign exchange rates – particularly of the Japanese Yen – but currency fluctuations only accounted for 1% of the negative impact.

The company had few notable developments during the quarter, but did launch its recently approved anticoagulant Eliquis (apixaban) and begin building a field force for the launch of rheumatoid arthritis drug Xeljanz (tofacitinib), which FDA approved in November Also see "Eliquis Label Looks Great, But May Leave Door Open For Pradaxa To Compete On Efficacy" - Pink Sheet, 7 January, 2013.. Tofacitinib was rejected by EU regulators, which cited the safety and efficacy of the drug. Pfizer management said during the call that it did not agree with the regulatory agency’s assessment and that it would seek to overturn the decision. The company said that the EU decision should have no impact on the approvals already granted in the U.S., Japan, and Russia.

Pfizer’s Phase II drug for breast cancer, palbociclib, received a breakthrough designation from FDA, which acknowledges therapies that have an early signal of being a significant improvement over current therapies. The company would not elaborate on what that could mean for the development timelines of the drug, but said that two Phase III trials in earlier-stage and high-risk patients, respectively, will begin later this year and that it will provide “more color” on the topic then. Pfizer began enrolling patients in a Phase III study evaluating palbociclib in combination with letrozole, the first-line treatment of postmenopausal women with ER Positive, HER2-negative advanced breast cancer, which represents 60% of cases amongst postmenopausal patients with advanced or metastatic breast cancer. The company said the drug could have potential in other cancer indications, but that it will explore its use in breast cancer first due to the strong signals of efficacy it has shown so far.

Molding The Future

For Pfizer, 2013 will be about change – or potentially lack thereof – as the company continues to mull over how best to structure its business going forward. While far from a new subject, speculation continues around whether the company should be broken up.

Pfizer has been looking for creative ways to replace the revenues lost when its blockbuster franchises went off patent, including the sale of its nutrition business to Nestle for $11.8 billion in 2012 and the spin-off of a minority stake in its animal health business through IPO that resulted in $6 billion for the Big Pharma, all while continuing its integration of Wyeth Also see "Pfizer Sells Nutrition Portfolio To Nestle For Nearly $12B" - Pink Sheet, 23 April, 2012. and Also see "Investors Crow For Shares Of Zoetis As It Begins Trading On The NYSE" - Pink Sheet, 1 February, 2013.. Yet, some investors believe the business has become too bulky and cumbersome, straying too far away from developing innovative drugs.

CEO Ian Read has floated the idea of splitting the business into two entities – an innovative drug company and an established generics business, but several years after first floating the idea, the company has yet finalize its decision Also see "Reading Into Pfizer's Changes: First Steps For New CEO" - Pink Sheet, 7 February, 2011..

“As we shared with you over the course of this last year, with the sale of the nutrition business and the successful IPO minority interest in Zoetis, we are building two strong businesses, an innovative core and a value core, each with distinct cost structures and operating drivers,” said Read during the April 30 first quarter call with investors. “We know it will take the next few years to fully realize the potential of each, and as each of these businesses progress, we will continue to evaluate how best to deliver their value to our shareholders.”

The biggest obstacles of the split are logistical – many of the drugs that that fall under the established products umbrella are manufactured along-side the innovative medicines. The company has also argued in the past that the established products feed into the consumer business as some of these drugs get converted to over-the-counter medications, resulting in a healthy revenue stream. Consumer products contributed $811 million to revenues in the first quarter. The emerging markets business is also a problem as it overlaps with both of these businesses.

The decision to split and what to do with the remaining 80% stake in Zoetis, the animal health business, weigh heavily on the company. As of now, Pfizer has not made any decision on how best to “maximize after-tax return to our shareholders” from the remaining stake in Zoetis, said Pfizer CFO Frank D’Amelio during the call.

Zoetis reported earnings on April 30 of $111 million, or 28 cents per share, on $1.1 billion in revenues – beating analysts’ expectations. The business reported strong growth in products for companion animals in the U.S. and benefitted from supply issues at competitors.

In the meantime, Pfizer has been wooing investors with dividend increases and share buybacks. The Big Pharma repurchased $6.3 billion, or 227 million shares, during the quarter. It has another $5.5 billion worth of buybacks that it has authorized remaining. Pfizer has retuned approximately $2 billion to shareholders this quarter through dividend payments.

Pfizer Posts Weak First Quarter As It Continues To Mull Over A Split

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