Looking Forward at Pfizer

With generic competition on the way for Pfizer's (NYSE: PFE) top drug, Lipitor, the company stepped up to the podium at the Bear Stearns Healthcare Conference this week to let investors know what its plans are.

Pfizer gave the usual big pharma spiel about cutting costs, focusing on its pipeline, and being aware of the challenges ahead. It reconfirmed its financial guidance of diluted earnings per share for 2007 and 2008, but gave little information on how it would compensate for the up to $19 billion in annualized product sales from drugs such as Lipitor, Viagra, and schizophrenia treatment Geodon, which will be facing generic competition by 2014.  

As any investor familiar with Pfizer can tell you, over the next three to five years the company will be faced with a multibillion-dollar hole in its top line as Lipitor loses patent exclusivity in various markets throughout the world.

The patent losses on Lipitor weren't such a concern until this year, as Pfizer was developing a successor to the Lipitor cholesterol-lowering franchise. When the development plans for this compound, Torcetrapib, were derailed in December because of safety issues with the drug, Pfizer was left scrambling for alternative ways to fill up the upcoming loss of billions of dollars in high-margin sales from Lipitor.

The Pfizer story and the scramble for new revenue sources following the genericization of top compounds is one facing nearly all the big pharmas: Sanofi-Aventis (NYSE: SNY), AstraZeneca (NYSE: AZN), and Johnson & Johnson (NYSE: JNJ).

As Pfizer stated during the Bear Stearns presentation, "due to changing markets and political environments" (i.e. governments throughout the world less concerned about intellectual property rights and reimbursement for me-too follow-on drugs), the trend to combat lost patent exclusivity will focus on developing biologic compounds that are significantly harder to copy (make generically) than their small-molecule counterparts.

The movement toward development of biologics is why AstraZeneca acquired MedImmune for $15 billion earlier in the year and why Pfizer is beefing up its pipeline with 25 biopharmaceutical compounds in preclinical or later stages, and another 40 in discovery. As Amgen (Nasdaq: AMGN) has shown with Epogen, that good complex biologic can provide years of generic-free blockbuster sales even after expiration of its key patents.

But even with this shift in its drug development and cost-cutting maneuvers, Pfizer acknowledged that there will be "no magic bullets and no quick fixes" for the smackdown on its sales growth that has already started. Not even a juicy 4.8% annual dividend yield will be able to fix all that ails Pfizer in the future, and for this reason, I've been a bear on shares of Pfizer and many of its big pharma peers.