Who are the winners and losers in pharma after the latest round of earnings?
For the fiscal quarter ending December 2015, Pfizer released its earnings on Tuesday 2 February. The consensus earnings per share forecast was $0.52, but the actual EPS came in a cent higher at $0.53. The positive earnings have not however seen a rise in Pfizer’s share price. Why is this?
The problem for multinational conglomerates like Pfizer is that a substantial portion of the company’s revenues are generated outside of the United States. Since the US dollar has been rampant against other major currencies, the strong dollar has hurt bottom-line earnings and revenues of this US pharmaceutical juggernaut.
However, we should keep in mind that, despite a small drop in the share price, Pfizer is in an enviable position owing to the strong revenues generated off its newly developed products including Ibrance (for breast cancer) and Prevnar (a pneumonia vaccine). Both of these products have generated windfall returns for the company. The company is cautiously bullish about 2016 projections with estimated revenues of between $49 billion and $51 billion for the current year. Wall Street was projecting revenues of $52.49 billion.
As a trader, you can certainly count on Pfizer to deliver massive and consistent profits and cash flows. The big news story in the wings is talk of the $160 billion purchase of Allergan. This strategic move would be adopted to cut Pfizer’s US tax obligation and have access to additional medicines. There is talk, however, that the US government could prevent the deal from going through. At present Allergan pays a maximum of 18% in taxes and Pfizer pays 25% – there are clear tax advantages for the merger.
GlaxoSmithKline weighs in with quarterly earnings
GlaxoSmithKline (GSK) has completed its three-tier restructuring and now focuses on vaccines, consumer healthcare and pharmaceuticals. This UK-based company beat consensus estimates for Q4 earnings, posting an EPS of $0.55 against estimates at $0.52, and revenues also increased year-on-year for February 2016.
The pharma giant is facing tremendous headwinds in the form of strong competition from generics and pressure from various markets all over the world. GSK has delivered mixed performances over the past year. Earnings in two of the past four quarters have exceeded expectations and the earnings surprise averaged out to 1.74%. This pales in comparison to Pfizer which has posted the following earnings surprises of late: Dec 2015 (+1.92%), Sep 2015 (+17.65%), Jun 2015 (+9.80%) and Mar 2015 (+2.00%).
Merck falls flat and disappoints investors
On Wednesday 3 February, Merck posted a loss of 2.5% in Q4 2015 revenue. The beleaguered company suffered as a result of plunging sales of Remicade for arthritis treatment and the effects of a strong US dollar. Shares slid 2% on the back of the news.
Merck’s net income declined to $2.54 per share with revenues of $981 million. Viewed on an adjusted basis, company revenue dropped to $10.22 billion – down from $10.48 billion. The consensus forecast was $0.91 per share on revenues of $10.35 billion but the actual EPS was slightly higher at $0.93.
AstraZeneca announces plans for R&D investment
Quarterly earnings from AstraZeneca came in under expectations owing to plans by the company to funnel money into R&D. The company admitted that core earnings would likely dip to low single digits by the end of the year. Investors were expecting stable earnings figures from the company and so shares were driven 5% lower in response on the LSE.
The reason why AstraZeneca is pushing R&D so heavily is that critical patents on profitable products are about to expire. In particular AstraZeneca’s premier statin drug Crestor will see sharp declines in sales when the patent expires. The company has put a strong cost-cutting strategy in place to deal with rampant expenses.
The case of AstraZeneca illustrates the difficulty for traders in picking pharma stocks. It’s not as simple as checking whether reported earnings beat consensus estimates, as we also need to consider how these companies are addressing other factors such as US dollar strength, a focus on emerging market economies and strategic investments in R&D.
Short-term weakness may be necessary to achieve long-term gains. AstraZeneca’s CEO, Pascal Soriot, is keen to stress that he is focused on net revenues of $45 billion by 2023, not $24.7 billion generated today.
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