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Pfizer Inc. (NYSE:PFE) is the largest pharmaceutical company in the world. It owns the cholesterol-lowering drug Lipitor, which brings in a quarter of its revenue and was the best selling medicine in the world in 2008.^[1]

However, Pfizer's 2008 sales stagnated at $48.3 billion, representing no growth from the previous year.^[2] Sales of depression drug Zoloft declined precipitously after its patent expired in 2005. The patent for Lipitor will expire in 2010, and there are no guarantees that another equally profitable drug will come to maturity before then. The cholesterol drug Torcetrapib was once hailed as Pfizer's next blockbuster drug but failed late stage clinical trials in 2006, severely setting back profit expectations and shaking investor confidence.

As the largest player in the market, Pfizer has greater power in marketing and forming alliances.^[3] The company also consistently posts the highest dividends in the industry.^[3] However, Pfizer faces challenges common to all players in the pharmaceutical industry, including issues surrounding patent expiration and FDA regulation. Pfizer's developmental pipeline included 213 products at the end of 2007,^[4] and investors in Pfizer will be betting that one of these drugs is the firm's next big hit.

Pfizer has announced that it plans to shift its research and development focus away from heart disease drugs to cancer and biotechnology drugs, which it says are more profitable. The former category includes the company's most profitable product, Lipitor. ^[5]

On January 25, 2009, Pfizer agreed to acquire rival Wyeth for $68 billion, or $50.19 per share, a 29 percent premium over the market price before rumors of the deal leaked. After the merger, Pfizer expects annual sales of over $70 billion and net income of over $20 billion. The company has stated that it plans to save $4 billion a year with the merger, which is one of the largest deals to hit Wall Street after the credit crisis.^[6] On October 15, 2009, Pfizer formally completed the acquisition of Wyeth following the receipt of regulatory approval of the acquisition from the required government authorities.^[7]

Corporate Overview

History

Source: 2008 Pfizer Annual Report^[8]

In 2006, Pfizer sold its Consumer Healthcare unit to Johnson & Johnson for $16.6 billion.^[9] The sale of the Consumer Healthcare unit, which included many over-the-counter brands such as Listerine, Nicorette, Visine, Sudafed, and Neosporin, indicates Pfizer's renewed focus on pharmaceuticals.

Revenue Sources

Pfizer's pharmaceutical sales accounted for $44.4 billion (91.8%) of its total 2008 revenue of $48.3 billion. The remainder of revenue came from the animal health division and miscellaneous corporate income.^[2]

Restructuring

On January 22, 2007, Pfizer announced plans to restructure its business dramatically, cutting costs and streamlining the drug development process. The downsizing initiative reduced its worldwide workforce by 10%, or 10,000 employees, as well as close three research and two manufacturing facilities.^[10] The company also remains on track to reduce annual expenses by $2B by 2011, and it further expects to realize $4B in cost reduction synergies through the Wyeth merger. ^[11]

Pfizer has announced that it plans to shift its research and development focus away from heart disease drugs to cancer and biotechnology drugs, which it says are more profitable. The former category includes the company's most profitable product, Lipitor. ^[12]

Business Update

In the second quarter of 2009, sales fell by 9% from a year before to $10.98 billion. Net income fell 19% from $2.78 billion to $2.26 billion.The company cited adverse foreign exchange rate movements as the main driver of the weaker numbers Sales from established products like Lipitor and Zyrtec continued to weaken, the former due to patent loss and the latter due to intense competition. ^[13]

For Q3 of 2009, Pfizer reported sales of $11.6 billion, a decrease of 3% from the same quarter of the previous year. Pfizer reported decreases in revenue from all of its major segments except for specialty care products, which grew 3% and includes the products Rebif and Revatio. Notable drivers of the decreased revenues include decreased Lipitor sales, loss of European exclusivity for the cancer drug, Camptosar, and continued decreased sales among drugs that are currently facing generic competition. Despite, the decrease in sales, Pfizer reported a 26% increase in net income to $2.89 billion, which the company attained through major cost-reduction initiatives.^[14] Pfizer raised its earnings outlook to $2.00-$2.05 from $1.30-$1.45 earnings per share, largely due to its acquisition of Wyeth, which it formally completed on October 15, 2009.^[15]

On November 5, 2008, Pfizer announced it had abandoned research on "changing regulatory perspectives" on prescription diet drugs. The news came after competitor Sanofi-Aventis announced they would be abandoning research of a drug of the same class, Acomplia, due to increased regulatory concerns over major psychological side effects.

On January 16, 2009, the FDA announced that it rejected Pfizer's osteoporosis drug Fabyln.^[16] While the drug appeared to be effective, regulators were concerned of increased risks of cancer.

Illegal Marketing Settlement

On September 2, 2009 Pfizer agreed to pay $2.3 billion to settle both civil and criminal allegations that it had illegally marketed its painkiller, Bextra, outside of the bounds of its label.^[17] The case had been ongoing for several months and Pfizer had already marked that exact sum for litigation costs on their 2008 year-end report.^[18] When a drug is prescribed as a treatment outside of what the FDA has approved the drug for, it is known as off label usage. While it is legal for a physician to prescribe a drug off label, it is not legal for the pharmaceutical company to encourage such practices. In addition to the fine, Pfizer agreed to disclose information about its relationship with physicians who conduct clinical trials for its experimental drugs.^[19]

Major Pfizer Drugs

Source: 2008 Pfizer Annual Report^[20]

Cholesterol and Hypertension

The public is generally aware of "good" (HDL) and "bad" (LDL) cholesterol and their consequences on long-term cardiovascular health. The development of a class of effective cholesterol lowering drugs known as "statins" is relatively recent. Statins currently on the market work to decrease LDL, and there is little to distinguish them in terms of LDL-reducing efficacy. Although high LDL levels are an important predictor of cardiovascular risk, a low HDL may be just dangerous. Currently, there is no drug on the market that raises HDL.

Pfizer's Lipitor is a statin that decreases LDL levels, and, due to its unprecedented safety and effectiveness, is now the best selling drug in the world. In 2007, Lipitor alone brought in $12.8 billion in revenue for Pfizer, accounting for more than a quarter of the company's total revenue.^[1] Currently, it is by far the most important drug for Pfizer and has contributed significantly to growth in the past several years. However, the patent for Lipitor will expire in 2010, which will have a major financial impact on Pfizer. It faces competition from the statins Pravachol by Bristol-Myers Squibb and Zocor by Merck, which dented Q2 2009 Lipitor sales.^[21]

Torcetrapib had previously been Pfizer's strongest candidate to replace Lipitor as a highly successful blockbuster drug. Torcetrapib increases HDL levels as well as lowers LDL levels, but clinical trials also showed a 60% increase in deaths in patients taking the drug, halting further development.^[22]

High blood pressure is another risk factor of cardiovascular disease. Pfizer's Norvasc is currently the world's most-prescribed branded medicine for lowering blood pressure, with sales totaling $3.0 billion in 2007.^[1] Norvasc is also used to treat angina, or a feeling of tightness in the body. Although it maintains exclusivity in many major markets globally, Norvasc has lost patent protection in several E.U. countries.

Since high cholesterol levels and hypertension often go hand-in-hand, Pfizer combined Norvasc and Lipitor into a single-pill drug marketed as Caduet, which has enjoyed great success in the market.

Central nervous system disorders

Pfizer makes a wide range of drugs used to treat a variety of central nervous system disorders. The most significant drugs in this category include Zoloft for depression (see Antidepressant Drug Market), Lyrica for epilepsy (see Antiepileptic Drug Market), and Geodon for schizophrenia (see Antipsychotic Drug Market). After its patent expired in 2006, Zoloft experienced significant declines in sales, bringing in only $531 million in sales in 2007, an 84% drop from $3.3 billion in 2005.^[1] Lyrica is one of Pfizer's most successful pharmaceutical launches, and sales improved as it continues to be approved to treat other conditions such as central nerve pain and generalized anxiety disorder. Geodon is one of the fastest growing anti-psychotic medications in the U.S. due to its efficacy and favorable metabolic profile over competitors. 2007 sales of Lyria and Geodon were $1.8 billion and $854 million.^[1]

Arthritis

Arthritis is a group of painful conditions caused by damage to the joints of the body, as a result of disease, injury, or aging. Osteoarthritis, one of the most prevalent forms of arthritis, commonly accompanies aging and is one of the leading causes of disability of the elderly. Pfizer's Celebrex is a well-prescribed drug used to treat arthritis-related joint pain. Celebrex belongs to a family of drugs called COX-2 selective non-steroidal anti-inflammatory drugs (NSAIDs). Recently, there have been concerns that all NSAIDs (such as naproxen and ibuprofen), as well as COX-2 selective NSAIDs, (such as Celebrex), may increase the risk of heart attacks. Merck's Vioxx, which was once a competitor drug to Celebrex, has been taken off the market due to these concerns and now faces significant liability issues. Although there are no signs that Celebrex will suffer a similar fate, all NSAIDs, whether non-selective or COX-2 selective, now carry a warning of increased cardiovascular risk. The success of Celebrex will depend on the outcome of clinical trials, including a large trial run by the Cleveland Clinic comparing Celebrex to naproxen and ibuprofen.

On January 10, 2008, the New York state court ruled in favor of Pfizer, deciding that there is no evidence that Celebrex causes heart attacks at the recommended 200 milligram dose.^[23] Although many Celebrex lawsuits are still pending, this decision sets a favorable legal precedent for the company. The drug is making a gradual comeback, with sales up to $2.3 billion in 2007 compared to $2.0 billion in 2006, but still falls short of 2004 sales of $3.3 billion.^[1]

Results of a study released on May 15 showed that Celebrex may also prevent lung cancer. The COX-2 enzyme fuels tumor growth, and as a COX-2 inhibitor, the drug decreases incidence of cancer. If this effect is proven to be substantial in future studies, the company may market Celebrex with its newly launched anti-smoking drug Chantix.^[24]

Other

• Viagra is the first drug to treat erectile dysfunction and remains a top seller with sales of $1.8 billion in 2007.

• Sales of allergy drug Zyrtec have stayed flat at $1.5 billion after its patent expired.

• The newly launched anti-smoking drug Chantix has been touted as the company's next blockbuster. Launched in 2006, sales have picked up with $883 million in 2007. It is currently the only branded and most effective smoking cessation on the market.^[25] It was fast tracked for FDA approval after its superior efficacy was demonstrated in clinical trials^[26] However, Chantix has been plagued by negative media after studies linked it to accidents, vision problems, heart problems, and suicidal ideation. Although further studies are needed to determine whether the problems are caused by the drug itself or are symptoms of nicotine withdraw,^[27] new prescriptions of Chantix have dropped by half since January and the company has launched a media campaign to emphasize the benefits of quitting smoking over risks of Chantix.^[26]

Trends and Forces

Pfizer's foray into the biogenerics market

In December 2009, Pfizer announced that it would be entering into the biogenerics business, creating generic versions of popular biologic drugs such as Amgen's Enbrel or Sanofi Aventis' Lovenex.^[28] Biologic drugs are much harder to replicate than small molecule drugs, and current legislation makes it very difficult for competitors to produce generic versions of the drug. However, proposed new legislation may pave a pathway for generic biologics, which if approved will affect the arthritis market by enabling the entry of generic competition which will lower prices and decrease the overall market size.^[29] Such legislation already exists in the European Union.^[30] Generic biologics are more expensive to manufacture than their small-molecule counterparts, and will likely sell at a higher price. In addition, there will be a higher barrier to entry as manufacturing expertise and clinical proof are required at higher levels. Pfizer's acquisition of Wyeth in early 2009 enhances its ability to compete in this market.^[31] Pfizer's success in the biogenerics business will significantly affect its growth in the next decade.

Pipeline Risks

Developing a new drug is a time-consuming and costly endeavor. Hundreds of thousands of candidate compounds must be screened to identify a handful of potential drugs, and even fewer of these candidate drugs are found to be effective at treating a disease. The drug must then pass strict safety standards in several series of clinical trials. The entire process of developing a new drug and bringing it to the market takes up to 10 to 15 years and on average costs $800 million.^[32]

Pfizer spends more on research and development than its competitors, spending $7.95 billion on research in 2008.^[33] Its product pipeline includes over projects in development, as of Q2 2009.^[34] However, the demise of Torcetrapib, a potential blockbuster cholesterol medication, illustrates the great risks that drug companies face. After reaching the last stage of clinical trials, Pfizer terminated Torcetrapib development in 2006 after studies showed a significant increase in mortality. This failure cost Pfizer nearly $1 billion and negatively impacted investor confidence. ^[22]

After the failure of Torcetrapib and several other smaller pipeline products, Pfizer forecasts sales of $1.44 billion in 2012 from its current pipeline products, compared to $8.54 billion that analysts predicted five years ago. With plenty of cash on hand but the imminent expiration of Lipitor in 2010, the company has announced a strategy of acquiring multiple small biotechs, rather than the mega-mergers of the past, in an attempt to re-energize its pipeline.^[35]

Generic drugs: stiff competition

For a detailed discussion of brand name vs generic medication, see also Brand name vs Generic medications.

Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years, during which a pharmaceutical company has an exclusive right to manufacture a particular drug. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper to produce (due to the substantially lower research and development costs) than brand medication, and the lower cost is often a strong incentive for consumers to choose generics over branded drugs. In addition, the presence of a generic alternative may force a decrease in the brand name medication's price, through increased competition.

Pfizer's business model is highly dependent on patent protection and the enforcement of intellectual property rights, and weak patent protection decreases the profitability of drugs. After the antidepressant Zoloft lost patent exclusivity in the last year, revenues declined to $531 million in 2007, compared to $3.3 billion 2005.^[1] Although this was offset by the launch of new products, major pharmaceutical companies like Pfizer are constantly threatened by the entrance of generics.

One of the biggest concerns for Pfizer in the near future is that the patent for Lipitor will expire in 2010.^[36] If the company cannot create another blockbuster drug to fill in this $12 billion gap, it will need to downsize, as it has done already to some extent.

In addition, the blood pressure medicine Norvasc and allergy medicine Zyrtec went generic in 2007, as will Camptosar, a chemotherapy drug, in 2008. Sales of Norvasc dropped from $4.9 billion in 2006 to $3.0 billion in 2007.^[1]

Political pressures: pricing/licensing

Like other global pharmaceutical companies, Pfizer faces constant pressure from governments and activist organizations to increase access by either lowering prices substantially or granting generic licenses. Although these policies would increase the volume of sales, there would be a significant impact on total profits. Pfizer is also facing increase in cost containments globally from managed care organizations, institutions and government agencies and programs. The board price cuts may decrease the global revenues. Additionally, the legislation related to price controls could affect the company’s business. Pfizer continues to lobby for favorable regulation and access policies.

Dependence on health insurance

Changes in health care coverage may impact Pfizer's sales. If an insurance program changes its policies and removes coverage for a certain treatment, sales of related drugs are likely to decrease. In general, insurance programs are more likely to cover essential expenses, such as heart disease medication, and less likely to cover nonessential expenses, such as cosmetic surgery. For example, Pfizer's Viagra sales have fallen as erectile dysfunction coverage has been eliminated from many health care programs.

Outsourcing

Pharmaceutical companies are seeking to cut manufacturing costs by outsourcing drug production overseas. Pfizer currently outsources 15 percent of its manufacturing operations, but recently announced that it will aim to double this figure to 30 percent. This increase in outsourcing is part of the company's ongoing restructuring efforts.^[37]

Competition Among Major Drug Manufacturers

Major competitors to Pfizer include Novartis, Merck, and Bristol-Myers Squibb. All three are pharmaceutical powerhouses, some with competing drugs. For example, Merck produces the cholesterol drug Zocor, which is in direct competition with Lipitor.

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[38]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7} PFE 2007 Annual Report pg. 17  
2. ↑ ^{2.0 2.1} PFE 2008 Annual Report pg. 16  
3. ↑ ^{3.0 3.1} The Long Case for Pfizer.
4. ↑ PFE 2007 Annual Report pg. 5  
5. ↑ Pfizer shifts focus to cancer and biotech drugs.
6. ↑ http://www.nytimes.com/2009/01/26/business/26drug.html?hp
7. ↑ Pfizer Completes Acquisition Of Wyeth
8. ↑ [1]
9. ↑ Johnson & Johnson to Buy Pfizer Unit. MoneyNews.com (June 26, 2006). Retrieved on 2007-07-19.
10. ↑ Pfizer to cut 10,000 jobs, close five plants; profit grows. CNNMoney.com (January 22, 2007). Retrieved on 2008-06-10.
11. ↑ Q2 2009 Earnings Call
12. ↑ Pfizer shifts focus to cancer and biotech drugs.
13. ↑ AFP. "Pfizer earnings down 19%." 22 July 2009.
14. ↑ Pfizer Reports Third-Quarter 2009 Results
15. ↑ Pfizer 3rd-quarter profit rises, tops Street
16. ↑ http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=PFE%3AUS&sid=a3KLvFldv3pg
17. ↑ Pfizer Pays $2.3 Billion to Settle Marketing Case
18. ↑ Pfizer Reports Fourth-Quarter and Full-Year 2008 Results and 2009 Financial Guidance
19. ↑ Pfizer's $2.3 Billion Mistake
20. ↑ [2]
21. ↑ AFP. "Pfizer earnings down 19%." 22 July 2009.
22. ↑ ^{22.0 22.1} Pfizer Shares Plummet on Loss of a Promising Heart Drug].
23. ↑ Pfizer's Celebrex gets break in court.
24. ↑ Pfizer's Chantix and Celebrex: An Anti-Smoking Double Play.
25. ↑ Cowen and Company. "Therapeutics Categories Outlook." March 2008.
26. ↑ ^{26.0 26.1} Pfizer's Full-Court Press to Save Chantix.
27. ↑ Pfizer stock down again as Chantix takes its toll.
28. ↑ Pfizer Seeks Boost From Copying Biotechnology Drugs
29. ↑ BIO: Biosimilars, Follow-On Biologics
30. ↑ [www.eahp.eu/content/download/25698/168176/file/SSR36-37.pdf Biogeneric drugs: from promise to reality in Europe]
31. ↑ Pfizer Seeks Boost From Copying Biotechnology Drugs
32. ↑ "2007 Pharmaceutical Industry Profile.
33. ↑ PFE 2008 Annual Report pg. 14  
34. ↑ [3]
35. ↑ Big Pharma Pipelines Failing to Meet Expectations.
36. ↑ PFE 10-K 2008 "US Basic Product Patent Expiration Year"
37. ↑ Pfizer considers outsourcing up to 30 percent of manufacturing, much of it to Asia.
38. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction