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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 is the best selling medicine in the world as of 2008.^[1]

However, Pfizer's 2007 sales have stagnated at $48 billion, representing a 0.1% growth from the previous year.^[2] Sales of depression drug Zoloft have 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]

Contents 1 Corporate Overview 1.1 History 1.2 Revenue Sources 1.3 Restructuring 1.4 Business Update 1.4.1 Acquisition News 2 Major Pfizer Drugs 2.1 Cholesterol and Hypertension 2.2 Central nervous system disorders 2.3 Arthritis 2.4 Other 3 Trends and Forces 3.1 Pipeline Risks 3.2 Generic drugs: stiff competition 3.3 Political pressures: pricing/licensing 3.4 Dependence on health insurance 3.5 Outsourcing 4 Comparison to Competitors 5 References

[edit] Corporate Overview

[edit] History

Pfizer was founded in 1849 as Charles Pfizer and Company, a chemicals business. Over the last century, it has aligned itself with the developing trends to become a research-based pharmaceutical company. Notably, Pfizer produced most of the penicillin used during World War II. Pfizer is now the world's largest pharmaceutical company, with over $48 billion in revenue in 2007.

In 2006, Pfizer sold its Consumer Healthcare unit to Johnson & Johnson for $16.6 billion.^[6] 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.

[edit] Revenue Sources

Pfizer's pharmaceutical sales accounted for $44.4 billion (91.8%) of its total 2007 revenue of $48.3 billion. The remainder of revenue came from the animal health division and miscellaneous corporate income.^[2]

Revenue & Net Income (in US$ billions)

	2007	2006	2005
Revenue	48.4	48.4	47.4
Net Income	8.1	19.3*	8.1
R&D	8.1	7.6	7.3

*Note: Pfizer sold its OTC unit for $16 billion in 2006.

[edit] Restructuring

On January 22, 2007, Pfizer announced plans to restructure its business dramatically, cutting costs and streamlining the drug development process. The downsizing initiative will reduce its worldwide workforce by 10%, or 10,000 employees, by the end of 2008, as well as close three research and two manufacturing facilities.^[7]

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. ^[8]

[edit] Business Update

In the second quarter of 2008, sales grew by 9 percent to $12.1 billion, of which 7 percent was due to favorable exchange rates. Net income more than doubled to $2.78 billion from $1.27 billion, but much of this was due to lower restructuring charges, down from $1.1 billion last year to $569 million. ^[9] Sales from Norvasc, Zyrtec, and Camptosar dropped by $500 million compared to last year because both drugs lost patent protection. ^[9]

Sales of Lipitor increased by 1% in the U.S. and 18% internationally, for a total 9% increase to $3 billion. On June 18, 2008, Pfizer settled a lawsuit with generics manufacturer Ranbaxy, extending the Lipitor monopoly until November 2011, which is 20 months later than some had expected.^[10] Lyrica increased by 52% to $614 million while Celebrex climbed 23% to $589 million.^[9]

[edit] Acquisition News

• Pfizer may counter a bid for 65 percent non-promoter stake in Indian pharmaceutical company Ranbaxy Laboratories, which would be worth $4.6 billion. ^[11]

[edit] Major Pfizer Drugs

As people today are living longer and making poorer lifestyle choices, significant research and several blockbuster drugs are related to the treatment of long-term ailments such as cardiac disease, arthritis, and diabetes. The following are some notable trends in drug development and how Pfizer's most important drugs fit in.

[edit] 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 has already begun to face competition from the statins Pravachol by Bristol-Myers Squibb and Zocor by Merck.

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.^[12]

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.

[edit] 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, Lyrica for epilepsy, and Geodon for schizophrenia. 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]

[edit] 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.^[13] 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.^[14]

[edit] 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.^[15] It was fast tracked for FDA approval after its superior efficacy was demonstrated in clinical trials^[16] 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,^[17] 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.^[16]

[edit] Trends and Forces

[edit] 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.^[18]

Pfizer spends more on research and development than its competitors, spending $8.1 billion on research in 2007.^[19] Its current product pipeline includes 213 projects in development.^[4] 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. ^[12]

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.^[20]

[edit] 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. 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]

[edit] 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 continues to lobby for favorable regulation and access policies.

[edit] 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.

[edit] 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.^[21]

[edit] Comparison to Competitors

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).

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.

Pharmaceutical and Biotech Industry — Competitive Operating Metrics (2007)
	Johnson & Johnson (JNJ)	Pfizer (PFE)	Novartis (NVS)	Abbott Laboratories (ABT)	Merck (MRK)	Wyeth (WYE)	Bristol-Meyers Squibb (BMY)	Eli Lilly (LLY)	Amgen (AMGN)	Schering-Plough (SGP)	Boston Scientific (BSX)	Biogen Idec (BIIB)
Revenue (in billions of USD)
Total Revenue	$61.10	$48.42	$38.95	$25.91	$24.20	$22.40	$19.35	$18.63	$14.77	$12.69	$8.36	$3.17
Gross Profit	$43.34	$37.18	$27.04	$14.49	$18.06	$16.09	$13.13	$14.38	$12.22	$8.29	$6.02	$2.84
Revenue Growth from 2006	14.57%	0.10%	10.94%	15.30%	6.90%	10.07%	12.12%	18.75%	3.53%	19.78%	6.85%	18.21%
Income
Net Income	$10.58	$8.14	$11.95	$3.61	$3.28	$4.62	$2.17	$2.95	$3.17	-$1.47	-$0.50	$0.64
Net Profit Margin	17.31%	17.05%	16.79%	13.92%	13.54%	20.61%	14.12%	15.85%	21.43%	-11.61%	-5.92%	20.12%
Operating Income	$13.28	$9.28	$6.78	$4.58	$3.37	$6.46	$3.53	$3.88	$3.98	-$1.22	-$0.01	$0.78
Return on Average Equity	25.60%	12.06%	14.43%	22.66%	18.33%	28.09%	19.15%	23.96%	17.19%	-22.17%	-3.26%	10.05%
Other
Employees	119,200	86,600	98,200	68,000	59,800	50,527	42,000	40,600	17,500	55,000	27,500	4,300

[edit] 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 2007 Annual Report pg. 16  
3. ↑ ^{3.0 3.1} The Long Case for Pfizer.
4. ↑ ^{4.0 4.1} PFE 2007 Annual Report pg. 5  
5. ↑ Pfizer shifts focus to cancer and biotech drugs.
6. ↑ Johnson & Johnson to Buy Pfizer Unit. MoneyNews.com (June 26, 2006). Retrieved on 2007-07-19.
7. ↑ Pfizer to cut 10,000 jobs, close five plants; profit grows. CNNMoney.com (January 22, 2007). Retrieved on 2008-06-10.
8. ↑ Pfizer shifts focus to cancer and biotech drugs.
9. ↑ ^{9.0 9.1 9.2} Pfizer, Inc. Q2 2008 Earnings Call Transcript.
10. ↑ Pfizer Settles Lipitor Suit.
11. ↑ Pfizer may counter Daiichi's Ranbaxy offer.
12. ↑ ^{12.0 12.1} Pfizer Shares Plummet on Loss of a Promising Heart Drug].
13. ↑ Pfizer's Celebrex gets break in court.
14. ↑ Pfizer's Chantix and Celebrex: An Anti-Smoking Double Play.
15. ↑ Cowen and Company. "Therapeutics Categories Outlook." March 2008.
16. ↑ ^{16.0 16.1} Pfizer's Full-Court Press to Save Chantix.
17. ↑ Pfizer stock down again as Chantix takes its toll.
18. ↑ "2007 Pharmaceutical Industry Profile.
19. ↑ PFE 2007 Annual Report pg. 14  
20. ↑ Big Pharma Pipelines Failing to Meet Expectations.
21. ↑ Pfizer considers outsourcing up to 30 percent of manufacturing, much of it to Asia.

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