Pfizer-Ranbaxy: Could There Be Trouble Brewing?

by: Michael Shulman

Pfizer (NYSE:PFE) was, at one time, the most owned stock in the world and the darling of individual and institutional investors alike. Despite looming patent expirations, an anemic pipeline and a stock that has significantly underperformed the S&P for the past five years, analysts and legions of blow-dried pundits on CNBC keep recommending the stock. In my service, ChangeWave Shorts, I have recommended short- and long-term puts on the stock. I myself am not short Pfizer.

Disclosure over, last week was not a good week for PFE in light of obvious and not so obvious news. It went oh-for-there in cancer trials - an experimental lung-cancer drug called figitumumab failed in trial as did Sutent, already on the market for two type of cancer treatment, in trials for advanced breast-cancer and failed to meet their primary endpoints. The Street read the headlines and the stock sold off a bit.

There was other news from halfway around the world (India) and a few blocks from my home (the FDA): Ranbaxy (OTC:RBXLF), an Indian generics and drug maker, got smacked by the FDA for faulty manufacturing processes, and not for the first time. Generics laws state the company "first to file" with the FDA gets a six month exclusive, enabling the generics manufacturer to charge near brand market prices and garner excess profits for two quarters. A while back Ranbaxy had this right with the blockbuster migraine drug Imitrex and failed to get FDA clearance of its manufacturing. Last week the same thing happened for a generic version of Flomax, the anti-incontinence drug that you see in ads while you are eating dinner.

What does this have to do with Pfizer? It's either good news or bad news - or no news - but as an investor it is a thread of news that bears watching.

This could be good news for Pfizer. In 2008, Pfizer cut a deal with Ranbaxy to delay its generic form of Lipitor as part of the settlement of patent litigation (Ranbaxy has first to file rights for generic Lipitor, known as Atorvastatin). In return for the settlement of patent violations, Ranbaxy agreed to delay selling Lipitor in the US until November of 2011. If it cannot make the pills, it cannot sell the pills and PFE gets to keep 100% market share at very high prices for another six months - amounting to potentially $4 billion or more in revenue. What are the odds that Ranbaxy has problems making Atorvastatin? Time released medications such as Lipitor are quite hard to manufacture - just ask Teva (NYSE:TEVA) or Schering Plough (SGP). They turned to a smallish company with great manufacturing expertise, Impax Labs (NASDAQ:IPXL), to help them out in this area. It is very possible that Ranbaxy could blow it again.

It could also be bad news if Ranbaxy's problems encourage other generic makers to go to the FDA and challenge the first to file status for Atorvastatin or take a different view of the Lipitor patents and claim that generics should be able to come to market in November of this year. There is some legal reasoning behind this and the lead dog in this fight - if it occurred - would be world generics leader Teva. Chances are slim that Teva would push patent litigation, and risk damages, by coming to market in April of 2011, which would be six months after some think Lipitor patents expire. But it could happen, and that would take 80% of a full year of revenue (and the profits) away from Pfizer.

Right now the market has priced in full generic competition for Lipitor in April of 2012. Investors need to be aware that the stock will get whacked if any probability of this date moving forward is built into Street expectations.

Disclosure: The author takes Lipitor