BMO's Evan Seigerman breaks down Pfizer and Regeneron's Q1 results

Key Concepts

• Regeneron (REGN): Pharmaceutical company discussed regarding its earnings, primarily focusing on its drug Eylea.
• Eylea / Eylea HD: Injectable drug for macular degeneration-related eye diseases. A key revenue driver for Regeneron facing pressure.
• Pfizer (PFE): Major pharmaceutical company discussed regarding its earnings, post-COVID strategy, expense management, and dividend concerns.
• Paxlovid: Pfizer's COVID-19 antiviral medication.
• Biosimilars: Biologic medical products highly similar to another already approved biological medicine. Mentioned as competition for Eylea.
• PNL (Profit and Loss): Financial statement summarizing revenues, costs, and expenses. Eylea is key to Regeneron's PNL.
• CapEx (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets. Regeneron is cutting CapEx guidance.
• Dividend Yield vs. Multiple: A financial metric comparison for Pfizer, highlighting concern when the dividend yield percentage is higher than the price-to-earnings ratio (multiple).
• Expense Management: Actions taken by a company to control costs. Pfizer noted for good progress.
• EPS (Earnings Per Share): A company's profit divided by the outstanding shares of its common stock. Pfizer forecasting guidance at the higher end.
• Obesity Drugs: Class of drugs for weight loss (e.g., Wegovy, Ozempic). A major focus area for pharma, with Pfizer discontinuing its candidate.
• Novo Nordisk (NVO) / Eli Lilly (LLY): Key players in the obesity drug market.
• Wegovy / Ozempic: Novo Nordisk's prominent obesity/diabetes drugs.
• Merck (MRK): Pharmaceutical company discussed regarding its manufacturing strategy for Keytruda.
• Keytruda: Merck's blockbuster cancer immunotherapy drug (a complex biologic).
• Biologics Manufacturing: Complex process for producing drugs derived from living organisms (e.g., using recombinant DNA technology, potentially involving Chinese Hamster Ovary (CHO) cells). Requires specialized facilities and skills.
• Transfer Pricing: Setting prices for goods and services sold between controlled (or related) legal entities within an enterprise. Used by Merck for tax benefits in Ireland.
• Tariffs: Taxes imposed on imported goods. Potential reason for Merck moving Keytruda manufacturing to the US.
• European Drug Pricing: Discussion on the pressure for European countries to pay more for innovative drugs, contrasting with US pricing.
• Medicare: US federal health insurance program. Discussed in relation to potential coverage for obesity drugs and IRA drug pricing negotiations.
• IRA (Inflation Reduction Act) Drug Pricing: Provisions allowing Medicare to negotiate prices for certain high-cost drugs.
• Most Favored Nation Pricing: A potential pricing model where a country agrees to pay prices no higher than the lowest price paid by other specified "favored" nations. Mentioned as a possibility under IRA.

Regeneron Earnings Analysis

• Main Issue: Regeneron reported weak earnings, primarily driven by misses across the board for its key eye drug, Eylea, and its newer formulation, Eylea HD.
• Eylea Details: This drug is administered via injection directly into the eyeball to treat macular degeneration-related diseases.
• Performance: Sales for both Eylea and Eylea HD missed expectations. The quarter was anticipated to be weak ("They were kind of telegraphing it"), but the results were worse than expected ("It's not bad until it's really bad").
• Competitive Pressures: The weakness raises concerns about the "durability" of the Eylea franchise due to competition from Roche and the emergence of biosimilars. Eylea is described as the "bread and butter of their PNL".
• Other Products: Libtayo, a cancer drug, also reported light sales. The COVID-19 antibody cocktail (famously taken by Donald Trump) is no longer authorized and contributes nothing to revenue. Dupixent remains another key drug for the company.
• Guidance: Regeneron is slightly cutting its Capital Expenditure (CapEx) guidance. The focus remains heavily on the Eylea performance and upcoming pipeline data later in the year.

Pfizer Earnings Analysis

• Overall Performance: Pfizer's earnings report was considered "pretty good," although the top-line revenue was slightly light (a "little percent light").
• Expense Management: The company is making "very good progress" with its cost control measures.
• Guidance: Pfizer is forecasting Earnings Per Share (EPS) guidance towards the higher end of its range, which is seen as encouraging.
• Dividend Concerns: A significant point of discussion is the high dividend yield relative to the stock's price-to-earnings multiple ("yield is higher than the multiple"). This situation raises concerns about the dividend's sustainability, although the analyst (David Segerman) doesn't believe a cut is imminent ("I don't think that's the case yet"). The comparison was made to Citigroup in 2008, though it was stressed Pfizer is not in that situation currently.
• COVID Legacy: Pfizer heavily invested in COVID-related products (Paxlovid, vaccine), described as having "bet the house on COVID."
• Obesity Strategy: Questions arise following Pfizer's discontinuation of its oral obesity pill candidate ("Dan" - likely Danuglipron) about two weeks prior. This raises strategic questions about competing in the lucrative obesity market.

Obesity Drug Market Dynamics

• Key Players: The discussion highlights Eli Lilly and Novo Nordisk as dominant forces.
• Comparative Strength: The analyst perspective favors Eli Lilly, stating they have a "better broader portfolio." Novo Nordisk (maker of Wegovy and Ozempic) is seen as facing "real commercial challenges," with its stock having significantly declined ("cut in half and then some"). BMO Capital Markets had downgraded Novo Nordisk ahead of data due to these commercial concerns.
• Market Importance: The high focus on obesity drugs ("fat drug") underscores its current significance for pharmaceutical company fortunes.

Merck Keytruda Manufacturing Shift

• Action: Merck announced plans to invest $1.5 billion to begin manufacturing its major cancer drug, Keytruda, in the United States.
• Current Manufacturing: Keytruda is primarily manufactured in Ireland.
• Reason for Ireland: Manufacturing in Ireland offered significant tax benefits. By domiciling intellectual property (IP) there, Merck could use transfer pricing to allocate costs to its Irish subsidiary and pay Ireland's lower corporate tax rate (12.5%).
• Reason for US Move: The primary driver suggested for bringing manufacturing to the US is the potential avoidance of tariffs on imported Keytruda ("I don't think they want to pay tariffs on it").
• Complexity of Keytruda: Keytruda is a "complex biologic" (recombinant protein), likely involving processes like using Chinese Hamster Ovary (CHO) cells. Manufacturing requires specialized skills, equipment, and FDA-inspected facilities.
• Transition Time: Moving manufacturing is not an overnight process due to the complexity of the biologic and its supply chain. While bringing some manufacturing to the US is seen as positive, Ireland is acknowledged to have a "great workforce" for biologics. Supply chains remain global.

European Drug Pricing Issues

• Pharma Perspective: Pharmaceutical companies are increasingly arguing that European countries need to increase what they pay for innovative medicines ("pay up a little more"). The argument is that Europe doesn't adequately "value the innovation," even from European-based companies, which often achieve better pricing in the US.
• Goal: There's a push to "equalize" pricing – not necessarily by lowering US prices, but by increasing European prices.
• Challenges: This is considered an "uphill battle" because European national health budgets are strained, making significant price increases unlikely. There's a perception (expressed somewhat sarcastically) that European nations are reluctant to pay for various things, including pharmaceuticals.

Medicare Policy Considerations

• Obesity Drug Coverage: A key focus is whether Medicare will decide to cover the new, expensive obesity drugs.
  • Argument For: The potential long-term health benefits and cost savings if obesity-related conditions are prevented ("What if you don't pay for it?").
  • Argument Against: The significant immediate cost ("big cost") to the Medicare program.
  • Political Context: The upcoming need to potentially renew the 2017 Tax Cut and Jobs Act means any new government expense will face heavy scrutiny. Congress holds the ultimate decision-making power.
• IRA Drug Pricing: Broader concerns exist around the implementation of the Inflation Reduction Act's drug pricing negotiation provisions. The potential for implementing "most favored nation" type pricing, where Medicare prices are benchmarked against lower international prices, is also being watched.

Conclusion/Synthesis

The discussion highlights significant pressures and strategic shifts within the pharmaceutical sector. Regeneron faces headwinds for its core product Eylea due to competition and biosimilars. Pfizer is navigating its post-COVID transition, focusing on expense control while facing scrutiny over its dividend sustainability and strategy after exiting the obesity pill race. The obesity market remains a central battleground, with Eli Lilly perceived as having an edge over Novo Nordisk. Merck's decision to onshore some Keytruda manufacturing reflects potential concerns about tariffs and supply chain resilience, despite the complexities and existing benefits of Irish production. Broader industry issues include the ongoing tension over European drug pricing versus innovation value and critical upcoming decisions regarding Medicare coverage for costly obesity drugs and the impact of IRA price negotiations.