Pfizer Inc. (NYSE:PFE) released Q3 2006 earnings at noon on Thursday, 19 October. CEO Jeffrey Kindler and Vice Chairman David Shedlarz spoke at some length about the very competitive operating environment facing Pfizer. Please recall that Pfizer's senior management team has only been in place for 11 weeks. This is the first quarter under their direction.

Financial highlights include Q3 revenue increase of 9%, and adjusted diluted EPS increase of 10% vs. Q3 2005. Q3 2006 revenues were $12.28 billion, up $1 billion form Q3 2005. Reported net income for Q3 2006 was $3.362 billion. CEO Kindler pronounced Q3 "a solid quarter in a tough operating environment." Both Kindler and Shedlarz forecast revenues and earnings will decline in 2007-2008, but do see a return to increased revenues and earnings in 2009.

Shedlarz specifically mentioned that Pfizer will NOT see modest revenue growth in this period as was previously forecast. One of the first tasks of Pfizer's new manangement team was to take a realistic look at the changes and challenges of Pfizer's current operating environemnt which includes short-term revenue restraints. Pfizer, as well as other pharmaceutical companies, face pricing pressure worldwide. Payers, particularly insurance companies, are trying to constrain rising costs of medicines.

In order to counteract these price restraints, Pfizer has initiated an across the board cost-cutting initiative. For 2006, Pfizer hopes to realize $2.5 billion in savings. with further measures in place to reduce 2007 and 2008 operating expenses to below 2006 levels. Pfizer hopes to realize $4 billion in cost savings in 2008. During this same period, R&D spending will increase, driving up operating expenses as much as 6%.

CEO Kindler has restructured Pfizer's R&D division so that the head of global R&D now reports directly to the CEO. This ensures that Pfizer senior management remains focused on creating new products and accelerating the search for new revenue opportunities. More information on R&D developments at Pfizer will be available at the 30 November analyst meeting. One reason why Pfizer is so focused on developing new products in that Pfizer faces the loss of exclusivity on a number of its best selling products in the US and European markets. In Q4 2006 and 2007 Pfizer will lose exclusivity on Zoloft, Accupril, Neurontin and Zithromax, all popular drugs.

There are some pieces of good news. Pfizer has very strong operating cash flow. Pfizer is in the process of selling its consumer healthcare business to Johnson & Johnson for $13.5 billion. Proceeds will be used to acquire new businesses and new product lines, including the acquisition of Quark Biotech Inc. and PowerMed Ltd. Two new products launched by Pfizer are Lyrica, a nerve pain abatement drug useful in cases of stroke, spinal-cord injury and multiple sclerosis. Sales of Lyrica were $340 million in Q3 alone. The drug is available in 60 countries currently. Pfizer also introduced a new insulin delivery drug called Exubera, available in Germany, Ireland, the UK and US. An intensive ad and education campaign to US primary care physicians will begin in Q4 2006. New smoking-cessation drug Chantix (Champix outside the US) will receive expanded distribution.

Despite losing exclusivity on a number of well selling drugs, Pfizer continues to experience good revenue return on worldwide sales of Lipitor, which earned a 15% increases to $3.3 billion based on double-digit sales growth in US and Asia. $2.1 billion of sales were in the US market alone. Worldwide sales of Celebrex earned $537 million in Q3. Pfizer forecast full-year product sales of $13 billion for Lipitor, $2 billion for Celebrex, and $1 billion for Lyrica.