Pfizer Reports Steady Results

We don't expect any major changes to our fair value estimate for Pfizer PFE after second-quarter results that largely met our expectations and the announced divestment of the firm's off-patent drug group (Upjohn) to Mylan. The divestment of the generics business should strengthen Pfizer's competitive positioning and wide moat by exiting a business that carries drugs with low pricing power to focus on innovative core drugs.

Divesting Upjohn (close to 20% of total sales) should enable Pfizer to accelerate its growth rate. With the majority of the Upjohn drugs facing increasing generic competition, we had expected this group to post 5% average annual declines over the next five years. By divesting the generics group, Pfizer's remaining innovative business line should post a five-year compound annual growth rate of close to 5%, up almost 200 basis points from the combined entity's growth outlook. Additionally, Pfizer should net close to $12 billion in cash from the divestiture, which should go to debt repayment, setting up a strong balance sheet for Pfizer to make additional acquisitions to further drive growth in innovative new drugs.

Turning to the quarter, Pfizer posted 2% operational sales growth, with recently launched drugs offsetting generic competition to several older drugs. We expect the generic pressures to increase as U.S. generic competition to neuroscience drug Lyrica intensifies. However, after divesting the Upjohn business (including Lyrica) in mid-2020 to Mylan, Pfizer's growth prospects should improve. We expect continued growth from several large drugs, including cancer drug Ibrance (potentially expanding indications into earlier adjuvant use), cardiovascular drug Eliquis (displacing the inferior drug warfarin), and the Prevnar platform (expanding the vaccine to cover seven additional valents).

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