Pfizer (PFE)
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Pfizer Inc. (NYSE:PFE) is the largest pharmaceutical company in the world. It owns the best selling medicine in the world, cholesterol-lowering drug Lipitor and has 14 other blockbuster drugs (annual sales >$1B). [1] In FY 2010, Pfizer generated revenues of $67.8 billion and net income of $8.26B. [2]
As the largest player in the pharmaceutical market, Pfizer has greater power in marketing and forming alliances. [3] The company also consistently posts the highest dividends in the industry. [3] However, Pfizer faces challenges common to all players in the pharmaceutical industry, including issues surrounding patent expiration and FDA regulation.
Pfizer CEO, Ian Reid, who took the helm of the company in 2010, announced that the company would look to divest significant portions of the company in order to focus on pharmaceuticals. [4]
Corporate Overview.
Pfizer was founded in 1849 as Charles Pfizer and Company, a chemicals business. Over the last century, it has aligned itself with the developing trends to become a research-based pharmaceutical company.. Notably, Pfizer produced most of the penicillin used during World War II. Pfizer is now the world’s largest pharmaceutical company with $67.8B in revenues and net income of $8.26B in FY 2010.
Restructuring.
On February 1, 2011, Pfizer announced plans to restructure its R&D operations. Overall the company plans to take $1.5 billion out of its drug research programs and use the proceeds to fund a $5 billion dollar stock repurchase program. The reduction in R&D was driven by a decision to reduce the number of disease areas the company will focus on.
Pfizer has announced plans to shift its research and development focus away from heart disease drugs to cancer and biotechnology drugs, which it says are more profitable. The former category includes the company’s most profitable product, Lipitor. [5]
Illegal Marketing Settlement.
On January 28, 2011 Pfizer was ordered to pay $ 142.1 million as damages for illegally promoting Neurontin for unapproved uses. The epilepsy drug, according to the judgment, was promoted for off-label use to help with migraines and bipolar disorder. The company currently faces 300 other lawsuits for illegal promotion of this drug. Pfizer has announced it will appeal this judgment. [6]
Recent Acquisitions.
On January 25, 2009, Pfizer agreed to acquire rival Wyeth for $68 billion, or $50.19 per share, a 29 percent premium over the market price before rumors of the deal leaked. The deal was one of the largest deals to hit Wall Street after the credit crisis. [7] On October 15, 2009, Pfizer formally completed the acquisition of Wyeth following the receipt of regulatory approval of the acquisition from the required government authorities. [8]
Business Segments.
Pfizer’s business divisions are divided into two major divisions: biopharmaceuticals (86% of total revenues), and diversified (14% of total revenues). The diversified division includes animal health, consumer healthcare, nutrition amongst others. [9]
Biopharmaceuticals (86% of 2010 Revenue)
Pfizer’s pharmaceutical sales accounted for $58.5 billion (86%) of its total 2010 revenue. The division includes primary care, specialty care, established products, emerging markets and oncology. [9] Some major products in this division are listed below:
Lipitor is a statin that decreases LDL levels, and, due to its unprecedented safety and effectiveness, is the best selling drug in the world. It is by far the most important drug for Pfizer and has contributed significantly to the company’s growth in the past several years. However, the patent for Lipitor expired in 2010, opening it to competition from generic drugs in addition to Pravachol by Bristol-Myers Squibb and Zocor by Merck. [10] Enbrel is prescribed to treat various forms of arthritis, plaque psoriasis, and ankylosing spondylitis. This was the largest drug that Pfizer acquired with its purchase of Wyeth. The drug’s profits are split with Amgen (AMGN), which owns half the rights to Enbrel. Lyrica is prescribed to treat epilepsy (see Antiepileptic Drug Market). Lyrica was one of Pfizer’s most successful pharmaceutical launches, and it has since been approved to treat other conditions such as central nerve pain and generalized anxiety disorder. Prevnar’ is a vaccine that prevent invasive pneumonia. Pfizer acquired it with its purchase of Wyeth. Celebrex is a well-prescribed drug used to treat arthritis-related joint pain. Celebrex belongs to a family of drugs called COX-2 selective non-steroidal anti-inflammatory drugs (NSAIDs). There have been concerns that all NSAIDs (such as naproxen and ibuprofen), as well as COX-2 selective NSAIDs, (such as Celebrex), may increase the risk of heart attacks. Merck’s Vioxx, which was once a competitor drug to Celebrex, has been taken off the market due to these concerns and now faces significant liability issues. Although there are no signs that Celebrex will suffer a similar fate, all NSAIDs, whether non-selective or COX-2 selective, now carry a warning of increased cardiovascular risk. Viagra , the famous erectile dysfunction drug, lost its patent protection in 2010 but continues to be an important drug for Pfizer. Norvasc is the world’s most-prescribed branded medicine for lowering blood pressure. [9] Norvasc is also used to treat angina, or a feeling of tightness in the body. Norvasc faces significant generic competition, which has led to steadily declining revenues.
Research and Development.
Pfizer has an enormous R&D budget; it spent $9.48 billion on research and development expenses in 2010. The increase was primarily due to the inclusion of Wyeth’s R&D facilities on the balance sheet following the merger. [9]
Researching and developing new drugs is the single most important consideration when identifying the prospects of any pharmaceutical company. A successful drug pipeline is critical because former blockbusters losing patent protection must be constantly replaced by new viable drugs.
The company’s largest drug, Lipitor, will lose its patent protection in late 2011, with its the next four largest drugs losing patent protection in 2012, 2013, 2027 (a new form of Prevnar) and 2014, respectively.
Trends and Forces.
Tightening FDA Regulations.
Beginning in 2009, the FDA implemented a series of reforms that include stricter monitoring of drug adverse events, more funding for the agency, stronger ability to force product recalls, more scientific expertise within the agency, more transparency. While the tightened regulations and increased transparency will eventually improve the overall quality of pharmaceutical products, companies will have to adjust to the stricter standards and stronger enforcement. [11]
Pfizer’s Foray Into the Biogenerics Market.
In December 2009, Pfizer announced that it would be entering into the biogenerics business, creating generic versions of popular biologic drugs such as Amgen’s Enbrel or Sanofi Aventis’ Lovenex. [12] Biologic drugs are much harder to replicate than small molecule drugs, and current legislation makes it very difficult for competitors to produce generic versions of the drug. However, proposed new legislation may pave a pathway for generic biologics, which if approved will affect the arthritis market by enabling the entry of generic competition which will lower prices and decrease the overall market size. [13] Such legislation already exists in the European Union. [14] Generic biologics are more expensive to manufacture than their small-molecule counterparts, and will likely sell at a higher price. In addition, there will be a higher barrier to entry as manufacturing expertise and clinical proof are required at higher levels. Pfizer’s acquisition of Wyeth in early 2009 enhances its ability to compete in this market. [15]
Pipeline Risks.
Developing a new drug is a time-consuming and costly endeavor. Hundreds of thousands of candidate compounds must be screened to identify a handful of potential drugs, and even fewer of these candidate drugs are found to be effective at treating a disease. The drug must then pass strict safety standards in several series of clinical trials. The entire process of developing a new drug and bringing it to the market takes up to 10 to 15 years and on average costs $800 million. [16]
Pfizer spends more on research and development than its competitors, spending $9.48 billion on research in 2010. [9] The company has a number of drugs in development, with 13 in late-stage clinical trials for indications that range from prevention of stroke and deep vein thrombosis to alzheimer’s disease and cancer. [17]
Competition From Generic drugs.
Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years, during which time a pharmaceutical company has an exclusive right to manufacture a particular drug. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper to produce (due to the substantially lower research and development costs) than brand medication, and the lower cost is often a strong incentive for consumers to choose generics over branded drugs. In addition, the presence of a generic alternative may force a decrease in the brand name medication’s price, through increased competition.
One of the biggest concerns for Pfizer in the near future is that the patent for Lipitor will expire in 2011. [18] In addition, the blood pressure medicine Norvasc and allergy medicine Zyrtec went generic in 2007; Camptosar , a chemotherapy drug, went generic in 2008. After patent expiration, all of these products saw precipitous drops in revenue. [19]
Political pressures: pricing/licensing.
Like other global pharmaceutical companies, Pfizer faces constant pressure from governments and activist organizations to increase access by either lowering prices substantially or granting generic licenses. Although these policies would increase the volume of sales, there would be a significant impact on total profits. Pfizer is also facing increase in cost containment globally from managed care organizations, institutions and government agencies and programs. The broad price cuts may decrease the global revenues. Additionally, the legislation related to price controls could affect the company’s business. Pfizer continues to lobby for favorable regulation and access policies.
Dependence on health insurance.
Changes in health care coverage may impact Pfizer’s sales. If an insurance program changes its policies and removes coverage for a certain treatment, sales of related drugs are likely to decrease. In general, insurance programs are more likely to cover essential expenses, such as heart disease medication, and less likely to cover nonessential expenses, such as cosmetic surgery. For example, Pfizer’s Viagra sales fell as erectile dysfunction coverage was eliminated from many health care programs.
Outsourcing.
Pharmaceutical companies are seeking to cut manufacturing costs by outsourcing drug production overseas. As of 2007, Pfizer outsourced 15% of its manufacturing operations, bu planned to double this figure to 30%. This increase in outsourcing is part of the company’s ongoing restructuring efforts. [20]
Competition Among Major Drug Manufacturers.
Pfizer’s major competitors include Novartis, Merck, and Bristol-Myers Squibb. All three are pharmaceutical powerhouses, some with competing drugs. For example, Merck produces the cholesterol drug Zocor, which is in direct competition with Lipitor. Pfizer also has a number of drug candidates in development that they have co-developed with the companies above as well as JOHNSON & JOHNSON (JNJ) and other smaller pharmaceutical companies.
Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer’s competitors by each drug market (See section on Major Drugs and Industry Trends).
Stock: Pfizer (PFE)
