It's always tough to imagine perennial stock market blue chips going into decay. Pfizer's
Much has been made of the U.S. patent expiration in 2010 for Pfizer's top drug, Lipitor. But this one drug is not Pfizer's only problem. In the next four years, products representing more than 40%, or $20 billion, of its $48 billion in revenues will be subject to generic competition. Once the generic manufacturers start producing copies, sales of these drugs will plummet rapidly, and so will Pfizer's income.
For example, year-over-year sales of Zoloft fell a precipitous 79% last quarter after generic versions of this Pfizer compound were introduced. There's no way Pfizer will be able to grow its top line in the coming years, considering the magnitude of lost sales it will have to fill on its income statement just to keep revenue stagnant.
Filling this hole in sales is obviously going to be no easy task, as Pfizer saw in December with the failure in clinical trials of its cholesterol treatment, torcetrapib. Also, Pfizer's drug pipeline is not exactly stocked up. It will be losing patent protection on 10 of its top products over the coming six years, yet has only eight drugs in phase 3 trials -- and four of these are for follow-on indications in already-approved products.
I'm sure my bullish colleague Ryan Fuhrmann will mention Pfizer's juicy 4.4% dividend yield, not to mention the gobs of free cash flow it can use to buy new drugs in development. I understand the allure of big dividends and free cash flow, but the problem for Pfizer is that without some dramatic changes to its business, those dividend and cash flow numbers are only going to get smaller.
Speaking of changes to its business, if Pfizer can't produce enough new drug candidates from its own pipeline, it will have to acquire new drugs or smaller pharmas to make up for these patent expirations. The problem is that there just aren't that many potential billion-dollar blockbuster drugs lying around in other companies' pipelines waiting to be acquired, and drugs like that are just what Pfizer needs if it wants to plug the massive shortfall in its revenue over the upcoming years.
Investors don't even have to wait until drugs like Lipitor go off patent in 2010 for the problems at Pfizer to manifest themselves. 2006 was a not a kind year for Pfizer, as its adjusted net income barely budged 4% higher. The company's management has said that it will be taking some intermediate cost-cutting steps to help its profitability, but cutting out SG&A expenses can only go so far in ameliorating ho-hum earnings growth.
All these problems with Pfizer's future could be forgiven if it were trading at some huge discount to its large-cap pharmaceutical peers. There's not enough room in this article to do any sort of justice to a valuation analysis of Pfizer, but even trading at a trailing-12-month earnings multiple of 13, Pfizer is not cheap, considering the huge amount of earnings that will evaporate once generic competition sets in on its top products.
The bottom line is that it's inconceivable for Pfizer's market capitalization to be valued at $188 billion four years from now, when its revenues could be 40% lower than they are today (barring some miraculous turn of events in its pipeline). That kind of revenue disruption is not worth any 4.4% dividend yield, and that's why I'm a Pfizer bear.
Fool contributor Brian Lawler likes bears and all other animals (besides the deer that attacked him last year) and does not own shares of any company mentioned in this article. The Fool's disclosure policy runs wild and free.