Pfizer's Generic Growth, With a Side of Sashimi

Pfizer (NYSE: PFE  ) is at it again. The pharmaceutical giant continues its push to try and beat generic-drug makers at their own game.

According to reports Pfizer's Japanese unit plans to set up a division next month dedicated to the sale of its drugs whose patents have expired. In the U.S., Pfizer calls the division its "Established Products Business Unit," which is just a euphemism for "too old to be worth a whole heck of a lot." In addition to selling its own products, earlier this year the unit licensed generic products from Aurobindo Pharma and Claris Lifesciences.

In general it seems like a good move. Unlike a true generic drug company, Pfizer doesn't have to spend money trying to figure out how to manufacture copycats of its own drugs. And there's plenty of potential for growth in Japan; generic drugs only make up about 20% of the drugs dispensed in Japan compared to more than 50% in the U.S. and Europe.

But growth in generic-drug revenue isn't going to make up for the loss of top brands. Remember generics are a low-margin business; it costs the same to make and distribute a generic drug as a branded one, but the revenue received is substantially less. Some of that difference is made up by the lack of advertising for generics, but there's also intense competition which drives down the price drug distributors are willing to pay. In the U.S., there are 11 companies that are approved to sell generic versions of Merck's (NYSE: MRK  ) Zocor.

In order to get over the low margins, you need large volumes -- think Target (NYSE: TGT  ) and Wal-Mart (NYSE: WMT  ) versus Saks and Tiffany. Dabbling in generics like Pfizer is doing may contribute to the bottom line a little, but making a large move into generics like Novartis (NYSE: NVS  ) has done seems like the only way to truly compete with the big boys, namely Teva Pharmaceuticals (Nasdaq: TEVA  ) and Mylan (Nasdaq: MYL  ) .

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Novartis is a Motley Fool Global Gains selection. Pfizer and Wal-Mart are recommendations of the Inside Value newsletter. The Fool's disclosure policy recommends against referring to your mom as an established product.


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