Source: Pfizer. 

It's been a rough decade for Big Pharma Pfizer (NYSE:PFE), which has seen its best-selling drug of all-time, cholesterol-lowering drug Lipitor, be exposed to generic competition and a host of other blockbuster drugs. Over the course of five years, nearly a third of Pfizer's total sales have vanished.

Pfizer has been showing signs of life in recent quarters. It has grown on an operational basis (excluding currency moves) in each of the past three quarters, and it garnered a key approval earlier this year when Ibrance was approved by the Food and Drug Administration as a treatment for metastatic breast cancer. With some success in expanding Ibrance's label, it could easily become a $3 billion to $5 billion per-year drug.

Acquisitions, innovation, and label expansion are three key components of Pfizer's long-term success strategy. However, on Wednesday evening, the FDA threw a monkey wrench in Pfizer's works.

The FDA turns Pfizer away
Based on a press release from Pfizer following the closing bell, the FDA issued a complete response letter (CRL) to the company advising it that the supplemental new drug application for Xeljanz, a JAK inhibitor, would not be approved as a treatment for moderate to severe chronic plaque psoriasis. As is the norm when receiving a CRL, the drug developer promises to work with the FDA to address any issues raised. 

Source: Pfizer.

The interesting aspect here is that Xeljanz, which was approved back in 2012 to treat moderate to severe rheumatoid arthritis, met its primary endpoint of non-inferiority to Amgen's (NASDAQ:AMGN) blockbuster anti-inflammatory drug Enbrel in the OPT Compare trial. Although the twice-daily 5 mg dose of Xeljanz did not meet its primary endpoint in OPT Compare, the twice-daily 10 mg dose did meet the classification of non-inferiority to Enbrel. This gave Pfizer substantial hope that the FDA would approve the label expansion for Xeljanz, given that it's already approved to treat rheumatoid arthritis.

...but only Pfizer is surprised
However, this rejection really only comes as a shock to one entity: Pfizer. I'd like to believe that Wall Street and investors were more than prepared for Xeljanz to be shown the door as a moderate-to-severe plaque psoriasis treatment for one important reason: safety.

Within the OPT Compare trial, the 10 mg twice-daily dose did match Enbrel's efficacy, and exhibited a comparable safety profile to Enbrel, but was deemed by some on Wall Street to come with a host of side effects that didn't exactly make Xeljanz look like an improvement over the existing therapies on the market.

Xeljanz has a pretty extensive list of adverse events that its label recommends users and physicians be on the lookout for. For example, it's been shown to increase the likelihood of certain types of infections, and it led to the viral reactivation of the herpes virus in clinical trials. Xeljanz was also shown to alter chemistry levels, including, but not limited to, lower blood cell counts, and higher cholesterol levels. Finally, and perhaps most concerning, Xeljanz may increase patients' risk of developing certain types of cancer, including skin cancer and lymphoma.

I want to be crystal clear that side effects (perhaps not the ones mentioned above) are common for any FDA-approved and experimental therapy. However, on a side-by-side comparison with Enbrel, Amgen's drug offers a considerably better safety profile than Xeljanz.


Source: Amgen via Flickr.

This also wasn't the first time a regulatory agency was turned off by Xeljanz's safety profile. The Committee for Medicinal Products for Human Use, or CHMP, in Europe advised turning down Xeljanz's marketing approval in rheumatoid arthritis because of serious safety concerns. The CHMP deemed that "it was not clear that these risks could be managed successfully in medical practice." Xeljanz was ultimately turned down by the European Medicines Agency.

What's next for Xeljanz and Pfizer?
A failure in moderate to severe plaque psoriasis certainly isn't enough to deter Pfizer, which has been pushing forward with plans to expand Xeljanz to ulcerative colitis.

A little more than three weeks ago, Pfizer announced top-line results from two of its phase 3 OCTAVE studies showing that Xeljanz met its primary endpoint once again. Of the more than 1,100 people who participated in the first two OCTAVE studies, a statistically significant proportion demonstrated remission at week eight in the Xeljanz arm as compared to the placebo group. Two additional phase 3 studies are ongoing, and together they will represent the required data for a supplemental new-drug application, most likely by the end of 2016.

The big issue that Xeljanz must overcome is its safety. Safety has cut Xeljanz's annual sales potential from an estimated $3 billion to $1 billion or less, especially if it finds a similar result in ulcerative colitis as it did with psoriasis. For added context, Xeljanz is on pace to generate around $500 million in sales in 2015.

Source: Pfizer.

With a wholesale cost of nearly $25,000 per year, Xeljanz is also finding little love from consumers or pharmacy-benefit managers. It is a slight discount to Humira and Enbrel in rheumatoid arthritis, but given its much less appealing safety profile; Humira's nearing patent expiration, which should spur generic entrants; and the introduction of biosimilars in the coming years, the savings-versus-benefits profile of Xeljanz just isn't all that attractive.

Now here's the good news: One drug does not make a company when it comes to Big Pharma. There's no doubt that shareholders are disappointed with Xeljanz's performance to date and its rejection in plaque psoriasis. Thankfully, Pfizer's ability to make earning-accretive acquisitions, repurchase its shares, and pay hefty dividends should be enough to keep Pfizer's shares somewhat steady despite the complete response letter.

I'm still a bit leery of Pfizer's near-term growth prospects, considering that Lyrica, it's second-best selling therapy, will lose patent protection in a few years. However, long-term investors with a 10-year or longer horizon should expect Pfizer's cash flow to remain healthy.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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