Pfizer Flexes Its Generic Muscles

Pfizer (NYSE: PFE  ) is moving further into the generic drug business. Today, the pharmaceutical giant announced a licensing deal for diabetes drugs made by India's Biocon.

Pfizer is paying $200 million up front for the rights to the drugs and potentially another $150 million in milestone payments. That's a lot of money for generic drugs.

Of course these aren't your run-of-the-mill drugs, either. In addition to standard insulin, Pfizer is gaining access to generic versions of sanofi-aventis' (NYSE: SNY  ) Lantus, Novo Nordisk's (NYSE: NVO  ) NovoLog, and Eli Lilly's (NYSE: LLY  ) HumaLog. They're all blockbusters and then some.

Drug

2009 Sales (in billions)

Lantus $4.3*
NovoLog $1.8*
HumaLog $2.0

Source: Company releases. *At current exchange rate.

Pfizer gains world-wide rights to the drugs -- with shared responsibility in a few countries -- but won't be able to sell the generics of the blockbusters in many countries for a while since they're still under patent. Biocon's standard insulin is approved for sale in 27 countries, but those are in developing markets. One has to wonder what kind of profit margins Pfizer can book selling generics in developing markets with Biocon taking a percentage of the revenue.

On the plus side, every move that Pfizer makes farther into generic drugs potentially increases the profit margin since there are fixed costs that don't necessarily scale up as its generic-drug division adds more products. As Teva Pharmaceutical (Nasdaq: TEVA  ) and Novartis (NYSE: NVS  ) have shown, bigger is almost always better when it comes to generic drugs.

There's nothing wrong with a company wringing out a little extra profits where there weren't any to begin with, but investors need to be careful as earnings are released. These generic deals and moves to sell branded medicine at a discount in developing countries will surely increase revenue. But it remains to be seen whether it's the best use of capital to grow the bottom line.

High growth meet high yield: Jim Royal has suggestion for a lifetime dividend play.

Pfizer is a Motley Fool Inside Value selection. Novartis is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of Teva and has a disclosure policy.


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