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New York-based drugmaker and Dow-30 component Pfizer (PFEFree Pfizer Stock Report) has reported second-quarter earnings of $0.51 a share, versus $0.33 in the comparable period of 2016. The year-over-year improvement was driven primarily by a sharp decline in production costs (-16%), which more than offset a 2% pullback in sales. Reduced restructuring and acquisition-related expenses (-78%) and modestly lower R&D outlays (-1%) provided further support to the bottom line. Meantime, adjusted earnings, which exclude one-time gains, charges, and other nonrecurring items, and are more closely followed by Wall Street, came in at $0.67 a share, versus $0.64 in 2016. While the adjusted tally beat consensus expectations of $0.66 a share, it was somewhat overshadowed by lingering softness on the top line. Shares of PFE were trading modestly lower on the release.

In the June period, total sales fell 2% year over year, to $12.9 billion. The figure came up short of Wall Street's $13.1 billion target and marked the third-consecutive top-line decline. Looking at the portfolio, Pfizer's Innovative Health segment, which sells newer, patent-protected drugs, contributed sales of $7.67 billion, representing growth of 8% year over year. Comps benefited from continued strength in top oncology asset IBRANCE (+66%), rheumatoid arthritis treatment XELJANZ (+55%), and blood thinner medication ELIQUIS (+50%). A solid contribution from number-two seller LYRICA (+5%) and the addition of XTANDI (acquired in the Medivation deal) provided further support, helping to offset lingering weakness in the top-grossing PREVNAR vaccine franchise (-8%) and continued overseas generic erosion of ENBREL (-20%). Meanwhile, Pfizer's Essential Health segment, which sells older, mostly off-patent drugs, saw its sales decline 14%, to $5.23 billion. A 30% decrease in Peri-LOE Products was the primary drag, due, in part, to the PRISTIQ franchise losing marketing exclusivity in the U.S. in March of 2017. Strong growth in the biosimilars segment (+55%) helped to lighten the blow, driven by growth in INFLECTRA.

Looking ahead, Pfizer will clearly be facing some pressure within its core product lineup over the next few years. PREVNAR sales continue to decline as its target market (older adults) appears to have reached a saturation point; ENBREL and VIAGRA are fading due to exclusivity losses in key markets; and LYRICA's U.S. patent is scheduled to expire in 2018. Given that these four products combined accounted for roughly a quarter of Pfizer's total sales last year, further development of the new product cycle will be imperative. While we are encouraged with some of the newer assets, particularly IBRANCE where peak sales estimates have ranged as high as $5 billion annually, we wouldn't be surprised if management executed another large-scale acquisition to bolster the portfolio. Following the second-quarter report, management narrowed its 2017 full-year adjusted earnings guidance to $2.54-$2.60 a share (previously $2.50-$2.60).

All told, we continue to view Pfizer as an attractive core holding within the large pharma space. The company has strong finances, high-grade fundamentals, and an impressive track record. An above-average dividend yield and expectations for continued stock repurchases should enhance shareholder value.

About The Company:Pfizer is a major producer of pharmaceuticals. The company is engaged in discovering, developing, and manufacturing of healthcare products. Important product names include LYRICA (nerve and muscle pain); PREVNAR (vaccine); ENBREL (arthritis, psoriasis, and more); IBRANCE (advanced breast cancer) and CELEBREX (osteoarthritis, rheumatoid arthritis). The company acquired injectable drugmaker Hospira in 2015 and medical devices producer Medivation in 2016.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.