Having had a disappointing 2013, where shares lagged the S&P 500 by 9% (up 23% versus a gain of 32% for the index), Pfizer (PFE -0.80%) has made an encouraging start to 2014. Indeed, shares are up more than 5% since the start of the year, while the S&P 500 is up less than 1%.

However, fourth-quarter results released by Pfizer highlighted the problems the business is currently experiencing. The main one, of course is the loss of patents on key blockbuster drugs that are open to competition from generics. The effects of this are significant, with Pfizer expected to deliver a fall in revenue in 2014 and in 2015 as a number of key drugs see sales fall because of copycat drugs.

The response from Pfizer is, as with many of its peers, to seek replacements for the drugs that are off-patent or will soon be off-patent. However, is Pfizer doing enough to counter the challenge presented by patent expiries and generic drugs? More importantly, can it continue to outperform the S&P 500 through 2014?

Mixed news
News flow surrounding Pfizer's pipeline in 2014 has been mixed. For instance, dacomitinib, Pfizer's potential treatment for an advanced form of lung cancer, missed its main goals in two late-stage studies in late January. The drug failed to show a statistically significant improvement in progression-free survival in a study comparing it with the treatment erlotinib. Furthermore, it also missed the aim of prolonging overall survival when compared with a placebo in the second study. The results from a third study are expected later this year or early next year.

However, not all trials are bound to be a success, and there have been positive developments for Pfizer, too. For example, it remains positive regarding its breast cancer drug, palbociclib, as well as a pneumonia vaccine called Prevnar 13. Indeed, the latter was reported to have met its objectives just last week in a trial that tested the effectiveness of the vaccine in 85,000 patients aged 65 or older against pneumonia. Meanwhile, Pfizer's breast cancer drug has the potential to add up to $3 billion per annum in revenues if it the FDA approves it. So while news has been mixed, there does seem to be light at the end of the tunnel for Pfizer.

Pfizer is not alone
Of course, other major pharmaceutical stocks are also experiencing patent expiries and are attempting to overcome the threat posed by generic competition. For instance, Bristol-Myers Squibb (BMY -0.62%) last week announced that the FDA has approved its drug, Myalept, to treat potentially fatal disorders involving the loss of body fat. The drug will be used as a replacement therapy to treat complications caused by leptin hormone deficiency in patients with congenital generalized lipodystrophy, which can ultimately lead to pancreatitis and diabetes.

In addition, sector peer Eli Lilly (LLY -1.74%) saw net profit fall by 12% in the fourth quarter of 2013. However, it's making solid progress and announced last week that a study comparing its drug for type 2 diabetes was comparable to a drug produced by Novo Nordisk in reducing blood sugar levels. It is forecast that the drug, dulaglutide, could net Eli Lilly up to $2 billion in additional revenue per year, subject, of course, to FDA approval.

Looking ahead
So while Pfizer is forecast to experience a fall in revenue of around 4% between 2013 and 2015, it's making the right moves to grow the top line in the long run. Sure, not all of the drugs currently in its pipeline are likely to be approved, and there will be disappointing news flow along the way, but it seems to have enough potential in its pipeline to deliver growth over the medium to long term. The market seems to be warming to this potential (as evidenced by its share price outperformance in 2014), and the rest of the year could prove to be a strong one for Pfizer.