Analyst Rips Pfizer a New One Over $1.5B Guidance Discrepancy
The reaction to Pfizer (PFE)'s Q4 2009 earnings call -- in which the company dialed back its 2012 revenue guidance to $1.5 billion less than it promised at the time of its merger with Wyeth -- didn't stop after sellers took the ax to Pfizer stock.
In a lengthy note to investors, Tim Anderson of Sanford Bernstein diplomatically ripped CEO Jeff Kindler a new one regarding promises alluded to in the Wyeth merger that now do not seem to be coming true. Anderson begins:
There had been much speculation about when PFE would finally admit its prior guidance was out of whack.He continued by alleging that Wall Street just hasn't believed Kindler et al's numbers for some time now, and still don't:
... many in the investment community that follow PFE closely have long recognized that the initial guidance for 2012 (e.g. revenues of $70B) seemed unrealistic, and while PFE today lowered that guidance (e.g. revenues now $66-68.5B), consensus is still likely to be markedly below this new range (consensus had been ~$60-61B, vs our figure of $63B).
... Many were hopeful that PFE would revise the guidance to get this "worst kept secret" out of the way and lift an overhang, but the revised guidance is still likely to be as much as ~$6-7B higher than the consensus model.To sum up, the consensus among analysts is that even after Pfizer's recent adjustment the firm is still overestimating its future revenues by as much as $7 billion (with a "b"). The evisceration continued regarding Pfizer's changing definition of "cost cutting":
PFE essentially appears to be lowering the amount of cost cutting from the Wyeth deal. The original guidance given a year ago was simply for $4B in cost cutting by 2012 ... The company has now introduced subtle, new verbiage into the conversation. Specifically, it is talking about "gross" cost cutting from WYE still being $4B, but after "choosing" to reinvest some of those savings the "net" savings will be more like $2-3B. Previously there hadn't been a discussion including the "gross" and "net" terms.When is a cut not a cut? When it's a $4 billion Pfizer "gross" cut that only "nets" $2 billion! Ba-dum-bump!
Anderson offers a sobering theory to explain this, which is that at the time of the merger both companies had already done their best to wring efficiencies out of their operations and post-merger management has belatedly discovered that there's no more blood to be squeezed from the stone:
First, the PFE/Wyeth merger was the combination of two companies that had already been heavily engaged in cost cutting for several years prior to the merger. This raises the specter that much fat has already been taken out of the system, and because of this the days of cost cutting "beats" will not be replicated as easilyThis, interestingly, dovetails with my (admittedly less sophisticated) analysis that showed both Pfizer and Wyeth becoming more efficient over the years -- until the merger:
In PFE's case specifically, however, we continue to wonder whether the company is caught in a slow, perpetual M&A cycle where every few years it finds itself needing to buy another big drug company. Wyeth is the third mega-merger Pfizer has done in 10y.Don't laugh: Anderson thinks the same phenomenon may raise its ugly head at Roche-Genentech and Merck-Schering-Plough.
It gets worse. Anderson then argues that Pfizer is cutting the wrong things. There are almost no cuts to sales, marketing and admin expenses, but the ax will fall heavily on R&D -- that's the opposite of what drug companies normally do in this situation:
Some drug company management teams have recently been claiming that R&D spending is not correlated to output, to which we ask, where is the data supporting this claim?
... as an industry where innovation lies at the core, cutting R&D should raise at least some red flags.
... with a tremendously large revenue base and no fewer than 9 highly profitable franchises slated to face generic competition through 2015, PFE had better have something to show for all of its R&D spending.Anderson concludes with an interesting -- and entirely plausible -- theory about the future of Big Pharma: These giant companies are no longer about R&D. They're going to leave that to the small specialty and biotech startups. Big Pharma's job is to acquire the ones that seem promising ... which is why the biggest drug company on the planet no longer regards its own R&D budget as sacrosanct.