Pfizer, Inc. (PFE - Free Report) reported second-quarter 2018 adjusted earnings per share of 81 cents, which beat the Zacks Consensus Estimate of 75 cents by 5.2%. Earnings rose 21% year over year.

The pharma heavyweight recorded revenues of $13.47 billion, which also beat the Zacks Consensus Estimate of $13.26 billion. Revenues rose 4% from the year-ago quarter on a reported basis. On an operational basis, excluding the impact of currency, revenues rose 2% year over year.

Higher sales of key brands Ibrance, Eliquis and Xeljanz made up for loss of exclusivity for some products, lower sales of legacy Established Products in developed markets and continued supply shortages in legacy Hospira products.

International revenues rose 11% (up 5% an operational basis) to $7.24 billion. U.S. revenues declined 2% to $6.23 billion.

Revenues from the Consumer Healthcare segment, which Pfizer is considering selling, rose 2% to $886 million. Global Oncology revenues increased 12% to $1.82 billion. Global Vaccine revenues rose 8% to $1.40 billion. Internal Medicine rose 3% to $2.53 billion. The Inflammation & Immunology franchise rose 4% to $1.06 billion. Additionally, the portfolio of Rare Disease declined 3% to $571 million.

Segment Discussion

Pfizer’s reporting segments are Pfizer Innovative Health (IH) and Pfizer Essential Health (EH). However, earlier this month, Pfizer said that it is reorganizing its business into three business segments, separating its Consumer Healthcare business into a standalone unit. Beginning 2019, Pfizer will report under three new business units — Innovative Medicines, Established Medicines and Consumer Healthcare. The present Innovative Health unit will be called Innovative Medicines. The Essential Health unit will be renamed Established Medicines.

Pfizer IH sales grew 8% on a reported basis (up 5% an operational basis) from the year-ago period to $8.27 billion as higher sales of Ibrance, Eliquis, Xeljanz, Xtandi and Prevnar offset lower sales of Enbrel.

With Viagra losing exclusivity in December 2017, its U.S. and Canada sales are now reported in the EH segment against IH previously. This hurt sales of the IH segment while adding sales in the EH segment.

All growth rates mentioned below are on an operational basis.

Ibrance revenues rose 19% year over year to $1.03 billion. Xeljanz sales rose 37% to $463 million. Lyrica sales rose 2% to $1.13 billion. Eliquis alliance revenues and direct sales rose 42% to $889 million. Chantix sales rose 11% to $277 million in the quarter.

Xtandi recorded alliance revenues of $171 million in the quarter compared with $159 million in the previous quarter. Pfizer markets Xtandi in partnership with Japan’s Astellas Pharma.

Global Prevnar 13/Prevenar 13 revenues rose 7% to $1.25 billion. Prevenar 13 revenues rose 8% in international markets. Prevnar 13 revenues rose 6% in the United States due to lower government purchases than last year for the pediatric indication and continued decline in revenues for the adult indication.

Enbrel revenues declined 15% to $551 million in key European markets due to biosimilar competition. Pfizer has exclusive rights to Amgen, Inc.’s (AMGN - Free Report) blockbuster rheumatoid arthritis (RA) drug, Enbrel, outside the United States and Canada.

Pfizer EH segment sales declined 1% (down 4% operationally) to $5.19 billion.

EH revenues were hurt by the loss of exclusivity and associated generic competition for products, primarily Viagra in the United States and Lyrica in Europe and lower revenues from sterile injectables portfolio due to continued legacy Hospira product shortages in the U.S. Also, lower sales of legacy Established Products in developed markets hurt EH segment sales.

Total Viagra sales declined 48% to $185 million due to generic competition that began in December 2017.

However, in the EH business, biosimilars and emerging markets did well in the quarter. Biosimilars revenues rose 44% operationally while emerging markets revenues grew 10% operationally.

Pfizer launched Inflectra, a biosimilar version of Johnson & Johnson (JNJ - Free Report) and Merck’s (MRK - Free Report) blockbuster RA drug Remicade, in November last year. While Inflectra recorded sales of $63 million in the United States and $158 million globally, other biosimilars brought in sales of $29 million (down 4%) from outside the U.S. markets.

Last week, Pfizer gained FDA approval for Nivestym, its biosimilar version of Amgen’s neutropenia drug, Neupogen. Earlier today, in a separate press release, Pfizer announced European approval for Trazimera, its biosimilar version of Roche’s cancer drug, Herceptin. This is Pfizer’s first approved oncology biosimilar.

Adjusted selling, informational and administrative (SI&A) expenses rose 1% (operationally) in the quarter to $3.51 billion. Adjusted R&D expenses were flat at $1.79 billion.

2018 Guidance

While Pfizer raised its earnings expectations for 2018, it slightly lowered the revenue guidance due to less favorable currency impact owing to a strengthening dollar.

Revenues are expected in the range of $53.0 billion to $55.0 billion compared with $53.5 billion to $55.5 billion previously. Adjusted earnings per share are expected in the range of $2.95 - $3.05 compared with $2.90 - $3.00 expected previously. At the mid-point, adjusted EPS is expected to increase 13% (previously 11%) while revenues are expected to increase 4%.

Research and development expenses are likely to be in the range of $7.7–$8.1 billion, higher than $7.4–$7.9 billion expected previously due to potentially higher R&D costs in the second half. The SI&A spending guidance was maintained in the range of $14.0–$15.0 billion.

Adjusted tax rate is expected to be approximately 16% compared with 17% expected previously.

Our Take

Pfizer’s second-quarter results were impressive as it beat estimates for both earnings as well as revenues. Meanwhile, lower than previously expected tax rate coaxed Pfizer to raise its earnings expectations despite lowered expectations for sales and potentially higher R&D costs.

Shares of Pfizer fell 1.5% in pre-market trading probably on the lowered sales forecast. This year so far, Pfizer’s shares have increased 6.5% compared with an increase of 1.2% for the industry.

Pfizer is facing headwinds in the form of genericization of key drugs, supply challenges in the legacy Hospira portfolio, pricing pressure and rising competition, which are hurting the top line. Nonetheless, we believe that new products like Ibrance, contribution from acquisitions, cost-cutting efforts, a lower tax rate and share buybacks should help the company achieve its guidance. Pfizer looks well poised to record profit growth in 2018.

Pfizer also boasts a strong pipeline and expects approximately 25 to 30 drug approvals through 2022, including around 15 products that have blockbuster potential.

Pfizer currently carries a Zacks Rank #3 (Hold).

Pfizer Inc. Price, Consensus and EPS Surprise

Pfizer Inc. Price, Consensus and EPS Surprise | Pfizer Inc. Quote