Pfizer (PFEFree Pfizer Stock Report), the world's largest drugmaker and a Dow-30 component, reported strong earnings growth during the second quarter, as sharply lower costs helped to offset continued generic deterioration on its cholesterol-fighting drug, Lipitor. Pfizer posted earnings of $0.43 a share, versus $0.33 in the comparable 2011 period. Adjusted earnings, which exclude items related to acquisitions and one-time charges, came in at $0.62 a share, versus $0.59 last year. In morning trading, shares of Pfizer edged up almost 3%.

Sales of the company's blockbuster Lipitor product plunged nearly 53% in the quarter (79% in the U.S.), as demand for the drug continued to dwindle in the wake of its patent expiration last November. While solid improvement in Animal Health (+3%) and Consumer Healthcare sales (+8%) were encouraging, a 10% decline in pharmaceutical sales stemming from the Lipitor overhang contributed to a 9% pullback in total revenue during the period ($15.1 billion).

Despite the lackluster top-line showing, management's continued focus on cost containment helped to spur profit growth in the second quarter. Overhead and research and development costs declined 17%, and 24%, respectively. Meanwhile, Pfizer also reached decisions in regard to its nutrition and animal health units, agreeing to sell the nutrition business to Nestle for $11.85 billion, while also announcing plans to spin off its animal-health operations. The company intends to file for an IPO for the unit, to be called Zoetis, by mid-August. PFE will look to sell an ownership stake equivalent to about 20%. We anticipate proceeds from each transaction will go toward continued share buybacks. Pfizer has repurchased about $3 billion worth of common stock through July 30th and still expects to buy back an additional $5 billion before year's end.

Besides Lipitor, Pfizer is scheduled to face generic competition on several other key products over the pull to 2018, including Viagra, Celebrex, and Lyrica. While cost management remains a prime focus, we believe it is essential that Pfizer doesn't compromise the health of its pipeline as a result. In our view, it is vital that the company maintains sufficient investment in product development in order to help offset upcoming patent expirations. In recent months, management has reported significant progress on this front and expects several new contributors to emerge in the coming years.

All told, our investment thesis remains largely unchanged from our last report. Pfizer is a strong company with solid fundamentals and sizable shares in most markets. Although patent expirations on several key products remain a near-term concern, we believe the drugmaker should be able to effectively weather the storm given its impressive track record. With several pipeline prospects showing promise in late-stage studies, we believe it is only a matter of time before these drugs are developed into meaningful top-line contributors. For investors seeking a strong total return play with relative stability, Pfizer's stock has an above-average dividend yield and a top rank for Safety (1). The company's Financial Strength (A+) is also outstanding.

About The Company: Pfizer is a major producer of pharmaceuticals, hospital products, consumer products, and animal health lines. Important product names include Norvasc (cardiovascular); Zoloft (antidepressant); Zithromax (antibiotic); Lipitor (cholesterol); Aricept (Alzheimer’s); Cardura (cardiovascular); Diflucan (antifungal); Zyrtec (antihistamine); Viagra (impotence); and Celebrex (rheumatoid arthritis and osteoarthritis). International sales accounted for about 60% of total sales in 2011.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.