Where Is Pfizer Heading With The Patent Cliff?

| About: Pfizer Inc. (PFE)

Pfizer (NYSE:PFE) has a healthy dividend scheme and a lot of good things going for it as a bio sector major. It also has patents expiring, and the resulting revenue loss, and a number of other concerns that we are going to put in a balance in this article and see if we can come up with an overall positive outlook for the company. But first, the facts.

Acura Pharmaceuticals (NASDAQ:ACUR), a small biotech company, has been issued a patent that covers, among other things, the company's AVERSION technology for discouraging misuse and abuse of pharmaceutical products. Certain rights under this patent are licensed to Pfizer, which uses the technology in its oxycodone hydrochloride (Oxecta) tablets.

The pain management market, acetaminophen, NSAIDs and opioids, is currently valued at $52 billion. The opioid segment, which is expected to grow at the rate of 20%, is likely to constitute 43% of the total pain management market. One of the major issues with pain management is tampering with widely used analgesic opioids with the purpose of misusing and abusing. The common tampering methods used include intravenous injections and nasal snorting.

Pfizer is also partnering Durect Corporation (NASDAQ:DRRX) and Pain Therapeutics, Inc. (NASDAQ:PTIE) in the development of another abuse-resistant drug, Remoxy, which has been rejected twice since the filing of a new drug application in 2008. Oxecta was approved in June 2011 but faces problems due to the high prevalence of generic version opioids.

These partnerships mean a lot for these small companies. Pfizer, on the other hand, is a pharmaceutical giant with too many irons in the fire. Valuation wise (market cap: $209.20 billion) it's the 13th largest company in the U.S.

Running the patent cliff

Data collected in 2010 showed that Pfizer had 68% of its portfolio at risk of patent loss within 3 years. Pfizer's blockbuster drug, Lipitor for cholesterol management, has been off-patent for a year now. The drug that was bringing in $10 billion annually now brings in only $4 billion. Earlier, Pfizer had also lost patent protection on drugs that together accounted for several billion dollars in revenue - drugs like Caduet, Benefix, and Revatio.

However, for Pfizer it has been more of a run across the cliff rather than falling off it. The revenue loss that was supposedly a potential disaster proved to be a damp squib. Pfizer's revenue dropped from $65.17 billion in FY 2010 to $58.99 billion in FY 2012 - a decline of only $6.16 billion. However, during the same period, net income increased by $6.31 billion, from $8.26 billion to $14.57 billion.

This was possible by reducing expenses including on R&D and selling, general and administrative. Moreover, Pfizer had a deep pipeline and made some acquisitions.


In 2011, the company sold its drug capsules business, Capsugel. Looking to boost its pipeline, the company made four acquisitions in 2011 and 2012.

  • Icagen Inc., a development-stage biotech company.

  • Ferrosan Holding A/S, a Denmark-based company that offers science-based consumer healthcare products.

  • Excaliard Pharmaceuticals, Inc., a company focused on developing drugs to treat skin scarring.

  • NextWave Pharmaceuticals, Inc., a specialty company focused on development and commercialization of products for treatment of attention deficit hyperactivity disorder (ADHD).

European Commission approves Bosulif and other positives

  • Bosulif (bosutinib), a tyrosine kinase inhibitor, was approved by the FDA last year as a second line treatment for myelogenous leukemia, a type of white blood cell cancer. On March 28, 2013, Pfizer announced that Bosulif received conditional approval from the European Commission for patients treated with one or more tyrosine kinase inhibitor(s) and for whom imatinib, nilotinib and dasatinib are not considered appropriate treatment options.

Conditional approvals are granted to drugs that address unmet needs and have a positive benefit/risk assessment. Although, the conditional approval needs to be renewed annually and also requires further efficacy and safety information for submission to EMA for formal approval, it opens the European market for the oncology drug.

  • Pfizer's Specialty and Oncology division is also likely to benefit from the results of a study by RAND Corporation that shows that direct cost of dementia treatment ($109 billion) is more than that of treating heart disease ($102 billion) and cancer ($77 billion). The study estimates that dementia prevails in 14.7% of U.S. population above the age of 70 and the total monetary cost between $157 billion and $215 billion depending upon the method used for valuing informal care.

  • Celebrex, Pfizer's anti-inflammatory pain relief offering and one of its top drugs, received an 18-month extension in patent protection, meaning a few billions of additional revenue. Viagra patent has also been extended to 2020.


The pharmaceutical industry offers a great opportunity for making huge gains. However, it is one of those sectors where you need to choose companies carefully and invest for the long term.

Despite fears of the so-called patent cliff, Pfizer has withstood its ground with ease. Although fears of revenue loss proved correct, the revenue loss did not impact profitability of the company. Pfizer has also found a way around the issue of patent expiration by seeking multiple uses for each drug.

Pfizer's long-term debt stands at $37.65 billion and an astounding amount of $104.54 billion as total liabilities including deferred long-term liability charges. Whereas the assets side of the balance sheet looks rosy with $185.78 billion, the reality is that most of it comprises of intangible assets and plant and machinery. There is however a cash and cash equivalent component amounting to $32.70 billion.

The company's debt obligations are a matter of concern but at the same time, debt to equity ratio, which went up in 2010 probably for funding acquisitions, has been coming down steadily.

This assumes greater significance considering that there has been a drop in share count as well.

Pfizer has an extremely long dividend history. The company has been paying dividends since 1987. Prior to 2009, it had been paying incremental dividends continuously for 21 years. Following the acquisition of Wyeth, the dividend was reduced to half - from $0.32 to $0.16. In 2010, the company reverted to its policy of increasing dividend every year and now pays $0.24 per share. At CMP, the dividend yield is a healthy 3.30%.

Considering recent acquisitions, patent extensions and improved profits, it can be safely assumed that Pfizer will be able to maintain its capacity to increase quarterly dividends without affecting its operations.

The bigger positive for Pfizer has been the company's decision to refocus on its pharmaceutical business. Rather than pursuing Johnson & Johnson (NYSE:JNJ) and become a healthcare conglomerate, Pfizer has chosen to unlock value the way Abbott Laboratories (NYSE:ABT) chose to by splitting the company into two separate companies.

Pfizer has sold its infant nutrition division and the animal health unit. There are also talks about splitting the company into two units - one for prescription and branded drugs and others for those that do not have patent protection.

However, as a value investor, I would take into account P/E multiples, which though are in line with the industry average are still pretty high at 23.10. Riding on positive news, the stock has gained more than 12% in the last three months. I would rather wait for a substantial correction before buying.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.