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Pfizer Inc. (PFE - Analyst Report) posted second quarter earnings of 62 cents per share, well above the Zacks Consensus Estimate of 55 cents and 5% above the year-ago earnings. Despite the loss of exclusivity of certain products and the unfavorable impact of currency fluctuation, earnings were boosted by cost reduction, productivity initiatives and a lower share count.

Revenues fell 9% to $15.1 billion, slightly above the Zacks Consensus Estimate of $15.0 billion. Loss of exclusivity impacted second quarter 2012 revenues by $1.8 billion or 11% compared with the year-ago period.

Including one-time items, second quarter earnings from continuing operations increased 31% to 42 cents.

The Quarter in Detail

While foreign exchange cut second quarter revenues by $451 million or 3%, operational factors impacted revenues negatively by $977 million or 6%.

International revenues declined 5% to $9.3 billion, mainly due to the unfavorable foreign exchange impact. Meanwhile, US revenues declined 15% to $5.7 billion. US revenues were hit by the loss of exclusivity of Lipitor in November 2011.

Biopharmaceutical products delivered second quarter revenues of $13.1 billion, down 10%. While the Primary Care, Specialty Care and Oncology units in the Biopharmaceutical segment recorded a decline in sales, Emerging Markets and Established Products posted an increase in sales.

The Primary Care unit recorded a 32% decline in revenues, which came in at $4.0 billion. A change in reporting for Lipitor and other genericized products affected Primary Care revenues by about $2.0 billion or 34% year-over-year.

Lyrica continued to perform well with sales coming in at $1,035 million, up 14%. Oncology product, Sutent, posted sales of $319 million, up 8%. Wyeth legacy products like the Premarin family and Enbrel posted sales of $274 million and $988 million, respectively.

Specialty Care segment sales declined 5% to $3.5 billion. The Prevenar franchise, which performed well in Japan and Australia, saw flat sales in the US and lower sales in developed Europe as most patients have already been vaccinated.

A change in the method of reporting Vfend, Geodon and Xalatan revenues also affected revenues – from January 1, Pfizer started including Vfend, Geodon and Xalatan revenues as a part of the Established Products unit. The change in reporting for these and other genericized products affected Specialty Care revenues by about $265 million or 7% year-over-year.

Meanwhile, the launch of generic versions of branded Pfizer products and the inclusion of Lipitor revenues contributed to the 16% increase in Established Products revenues, which came in at $2.7 billion. The deal with Watson Pharma regarding the sale of an authorized generic version of Lipitor also had a favorable impact on revenues.

Lipitor was hit hard by the loss of exclusivity in the US. Despite making significant efforts to reduce the impact of generic competition, Pfizer saw Lipitor sales fall 78.9% to $296 million in the US. Generic competition increased as multiple players like Mylan (MYL - Analyst Report) and Dr. Reddy’s Labs (RDY - Analyst Report) launched their generic versions of Lipitor.

The second quarter saw Emerging Markets record an 8% growth in revenues which came in at $2.6 billion. The timing of government purchases in Turkey and Brazil and strong performance in countries like China, and Russia drove revenues.

Both the Animal Health (up 3% to $1.1 billion) and Consumer Healthcare (up 8% to $768 million) segments recorded an increase in revenues. The strong performance of the global livestock and companion animal portfolios drove Animal Health results.

Consumer Healthcare revenues benefited from the Ferrosan Consumer Health and Alacer Corp. acquisitions.

Selling, informational and administrative (SI&A) expenses fell 18% to $3.9 billion during the quarter. R&D expenses fell 19% to $1.7 billion. Pfizer remains committed to its cost-containment efforts and should realize cost savings due to workforce reductions, actions taken with the R&D portfolio, as well as savings from a smaller physical footprint.

Maintains 2012 Guidance

Pfizer maintained its earnings and revenue guidance for 2012. Pfizer expects earnings of $2.14 - $2.24 per share on revenues of $58 - $60 billion. The Zacks Consensus Estimate currently stands at $2.20 per share on revenues of $59.7 billion.

Pfizer maintained its R&D guidance of $6.5 - $7.0 billion. Pfizer intends to focus on those disease areas which represent higher potential. Pfizer also reiterated its SI&A spend guidance of $16.3 - $17.3 billion.

The company intends to buy back shares worth $5 billion in 2012. Pfizer has bought back shares worth $3 billion through July 30.

The company remains on track where the sale of its Nutrition business and the separation of the Animal Health business are concerned. Pfizer expects to file a registration statement with the Securities and Exchange Commission (SEC) by mid-August for an initial public offering (IPO) of up to a 20% ownership stake in Zoetis, the stand-alone Animal Health company. Pfizer expects to complete the IPO in the first half of 2013.

Neutral on Pfizer

We currently have a Neutral recommendation on Pfizer, which carries a Zacks #3 Rank (short-term Hold rating). While near-term earnings will be driven by cost cutting efforts and share repurchases, longer-term growth will depend on the success of drug development.

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