The market is underappreciating the earnings growth potential of current drugs and the pipeline.
reported fourth-quarter results slightly below our and consensus expectations, but we don’t expect any major changes to our $37 fair value estimate. We continue to view the stock as undervalued, with the market underappreciating the earnings growth potential of current drugs and the pipeline. The steady gains in the quarter from the broad portfolio, up 5% operationally, combined with a developing pipeline help reinforce our wide moat rating.
Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.
Despite the quarterly sales shortfall, with vaccine Prevnar 13 causing close to a 300-basis-point headwind to overall sales growth, we expect the vaccine will stabilize in 2017, and continued strength with cancer drug Ibrance will offset generic competition to other drugs, leading to slight top-line growth in 2017. While the expansion of Prevnar 13 into the adult patient population led to strong sales gains in 2015, the loss of the bolus of adult patients is weighing on growth; however, this trend should normalize in 2017 as demand from Europe in the adult patient population should grow. Additionally, we expect steady price increases of close to 6% in the United States helping to drive sales growth of the vaccine.
Ibrance’s strength in the quarter--up almost 100% to represent close to 5% of total sales--should continue despite emerging competition from Novartis and Eli Lilly in 2017. Pfizer controls a solid first-mover advantage with Ibrance, which is particularly important in cancer. While Novartis’ drug doesn’t look much different from Ibrance and carries increased side effects, Lilly’s drug showed better monotherapy data (progression-free survival of 9.1 months with 11% neutropenia versus 3.8 months with 46% neutropenia for Pfizer), but the trial sizes were very small and subsequent data from Lilly hasn’t been as strong. We expect price increases in the U.S. combined with the international rollout of Ibrance to drive sales close to $8 billion by 2020, ahead of consensus expectations of $5.5 billion.
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