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Analyzing Pfizer’s 3Q15 Earnings and Financial Guidance

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Pfizer’s profitability

Pfizer (PFE) reported a fall in revenues of ~2.2% during 3Q15. Its net profit margin fell by ~4% to 17.6% for 3Q15 as compared to 21.6% for 3Q14. The company’s gross margin rose by 0.8% to 81.6% in 3Q15 over 3Q14. The cost of sales fell for GIP and GEP segments while it was partially offset by an increase in the cost of sales for the VOC segment, resulting in improved gross margin.

Operating profit margin fell by 2% to 27.8% for 3Q15 as compared to 29.8% for 3Q14. The selling, informational, and administration expenses rose due to the launch of new products as well as increased spending on promotional activities of existing products. The research and development expenses as a percentage of sales rose due to higher spends on the late-stage pipeline across all segments.

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Financial guidance for 2015

Pfizer updated its range for certain components in the financial guidance for 2015 following the anticipated impact of legacy Hospira operations on Pfizer’s financial results from September 3, 2015, onwards. The revenues are estimated between $47.5 billion and $48.5 billion, which is nearly 3% lower than 2014 revenues of $49.4 billion. The company expects around $1.5 billion in revenues from Hospira operations for 2015, considered from September 3, 2015, onwards.

The estimated range for the cost of sales as a percentage of revenues is between 18.7% to 19.2%, which was earlier estimated between 18.0% to 18.5%. This is due to the increased costs of sales for Hospira products. Also, the selling, informational, and administrative expenses are estimated between $13.6 billion to $14.1 billion while the research and development expenses are estimated between $7.5 billion to $7.8 billion following the developments on various products.

Pfizer has revised estimates for the adjusted diluted EPS to be in the range of $2.16 to $2.20 for 2015, which it earlier estimated to be between $2.04 to $2.10 following the impact of both Pfizer’s product portfolio as well as Hospira products.

The VanEck Vectors Pharmaceutical ETF (PPH) holds ~5.6% of its total assets in Pfizer while it holds ~7.9% in Novartis (NVS), ~7.4% in Johnson & Johnson (JNJ), ~5.2% in Novo Nordisk (NVO), and ~5% in Merck (MRK). Investors can also consider ETFs like the S&P International Health Care Sector SPDR ETF (IRY) or the Health Care Select Sector SPDR ETF (XLV) in order to divest the risk.

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