Pfizer Aims at Lower Tax Rate as Share Buybacks Continue

Pfizer's Top-Selling Product Lyrica
Pfizer’s top-selling product, the pain drug Lyrica, saw sales rise 11 percent to $1.26 billion. Photographer: Daniel Acker/Bloomberg

Jan. 28 (Bloomberg) -- Pfizer Inc. reported profit that beat analysts’ estimates after lowering its industry-high tax rate, an effort the world’s biggest drugmaker said will continue as it repurchases billions in stock.

Pfizer projected an effective tax rate of 27 percent for this year. That may be difficult to reduce further as the New York-based company plans to keep bringing back cash from overseas and is taxed by the U.S. government for doing so.

“There’s nothing that anyone’s doing in a tax-planning environment that we’re not doing,” Frank D’Amelio, the company’s chief financial officer, said today in an interview. Profit earned in low-tax overseas jurisdictions is taxed at higher U.S. rates when repatriated for dividends and buybacks.

Investors have been watching for a potential breakup of Pfizer’s drug business after Chief Executive Officer Ian Read divested the nutrition and animal health businesses over the past two years. Pfizer is dividing internal operations into three units, though any full split probably wouldn’t happen until 2017, according to the company.

Read today didn’t comment on whether the company would actually split. Pfizer’s established products line, which consists of medicines that are no longer patent protected, has attracted the interest of generic-drug makers including Mylan Inc. and Actavis Inc.

“We have not been approached by anybody that has an offer that would make those scenarios attractive, but we continually look for ways of increasing shareholder value and are open to any of those ideas,” Read said in a telephone interview.

Quarterly Results

Pfizer today reported fourth-quarter earnings excluding one-time items of 56 cents a share, 4 cents more than the average of 16 analysts’ estimates compiled by Bloomberg. Net income dropped 59 percent to $2.57 billion, or 39 cents a share, from $6.32 billion, or 85 cents, a year earlier, because of the divestiture of two units. Revenue fell 2 percent to $13.6 billion.

Pfizer cut its tax rate in the quarter by two percentage points to 27.7 percent from a year earlier. The company also reduced costs by $291 million, or 3 percent, through what Pfizer said were productivity and efficiency measures.

The results were boosted by Pfizer’s stock buyback programs. The company cut its shares outstanding by 862 million in 2013. That came through exchanging Pfizer shares for stock in Zoetis Inc., the animal health company that had an initial public offering last year, and $16.3 billion in repurchases, for about 13 percent of Pfizer’s stock.

The company said it plans to buy back another $5 billion shares in 2014.

Shares Gain

Pfizer rose 2.6 percent to $30.42 at 4 p.m. New York time. The stock has gained 13 percent in the past 12 months, lagging behind the Standard & Poor’s 500 Pharmaceuticals Index, which rose 23 percent over that period.

“Others in the peer group have been firing on all cylinders and Pfizer has just been average,” said Judson Clark, an analyst with Edward Jones & Co., in a telephone interview. “With as well as the market’s done, it’s tough to just be average.”

Pfizer forecast 2014 profit of $2.20 to $2.30 a share, compared with analyst estimates of $2.28 a share. Sales are projected to be $49.2 billion to $51.2 billion, compared with the $49.5 billion average of 15 analysts’ estimates compiled by Bloomberg.

Products Needed

Divestiture of its animal health and nutrition businesses and an overhaul of research and development was meant to focus the company on developing new medicines. The drugmaker needs new products to help replace lost sales of Lipitor, a cholesterol pill that once generated almost $13 billion a year before losing ground to generic versions.

Pfizer’s top prospects include palbociclib, a treatment for breast cancer, and expanded use of Prevnar 13, a pneumococcal vaccine that’s being studied for wider use by adults.

That pipeline is a reason to own the stock, said Tony Scherrer, director of research at Smead Capital Management Inc. “You can buy these global pharma franchises that have great pipelines and are well managed for half the multiples that you pay for” Gilead Sciences Inc. or Biogen Idec Inc., he said in a telephone interview. The firm has about 627,000 Pfizer shares.

New drugs that have come to market under Read have sold slowly. Eliquis, a blood thinner marketed with Bristol-Myers Squibb Co. and a projected blockbuster, doesn’t report separate sales. Xeljanz, a rheumatoid arthritis treatment and pill-form alternative to current injections like AbbVie Inc.’s Humira, generated $46 million in the fourth quarter.

Pfizer’s top-selling product, the pain drug Lyrica, saw revenue rise 11 percent to $1.26 billion. Enbrel, a rheumatoid arthritis treatment sold with Amgen Inc., sold $1.01 billion.

The company has been studying Prevnar 13 in an 84,000-person trial called Capita that will evaluate whether the vaccine should be used in adults, as well as children and the elderly. Results are expected in the next several weeks, Schoenebaum said, and may mean $1 billion in new sales of the drug. Prevnar 13 and a related vaccine sold $1.12 billion in the fourth quarter, a 3 percent increase.

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