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Summary

  • Stock price plunged following the patent expiry of Viagra in China, one of its key markets.
  • Top line had shrunk by 8% when the patent expired in Europe. The company had to launch a low-cost version, White Diamond, to stay afloat with the cut-throat competition.
  • The company has joined hands with French biotech company, Cellectis, to replenish its oncology pipeline.
  • Inaugurated a state-of-the-art research site in Cambridge.
  • Undervalued stock amongst the industry peers, based on forward PE valuation. The low price marks a good entry point for long-term investors.

Pfizer Inc. (NYSE:PFE) witnessed a plunge in its price following the loss of exclusivity of its drug, Viagra, in one of the key emerging markets, China. Although the management was prepared for the patent expiry, it has had a major impact on investor confidence, as shown by the price movement.

Let's take a look at how this will impact Pfizer's financial and market position.

The Repercussions

The company has enjoyed a market lead in the Chinese market for its erectile dysfunction "ED" drug. Pfizer raked in almost 60% of the total ED market revenue of China in 2013. Other drugs on the market included Cialis and Levitra. Many companies had previously tried to win over Pfizer's patent, but had failed and were left with the option to patiently wait for this time.

According to the news, the patent expiry has paved the way for at least 10 Chinese companies to file for patent approval to China Food and Drug Administration (CFDA), which includes the Shanghai-listed Lianhuan Pharmaceutical, Baiyunshan and China Pharmaceutical, as well as Shenzhen-listed drug maker Changshan, and the unlisted companies Luxi and Jilin Pharmaceutical.

The target market of ED drugs in China is estimated to be at least $9.67 billion per annum. Viagra, the market leading drug, had garnered 58.8% of total market revenue for Pfizer. Previously, the patent expiry in Europe had resulted in an 8% dip in the global sales revenue of the company in the last fiscal year. Sales revenue also plunged significantly on the back of patent expiry in South Korea.

Due to the high price tag attached to Viagra, the costumers quickly switched to the lower-cost generic versions as soon as they were made available in the market. A similar reaction is expected in China as well, where many cheap alternatives are expected to be introduced in the near future.

In Europe, Pfizer combated the pricing issue by introducing a cheap version of Viagra, known as the White Diamond. As of now, the company has disclosed that it has no plans to introduce a similar substitute drug in China. In the light of the current decision of the management of Pfizer, I expect the patent expiry to affect Pfizer's top and bottom line.

Oncology Market Focus

Accepting its failure in acquiring AstraZeneca (NYSE:AZN), the company has moved forward by looking at other options to replenish its oncology pipeline. The company recently entered into an agreement with French biotech company Cellectis to develop cancer immunotherapies. The immunotherapies are of the Chimeric Antigen Receptor T-cell (CAR-T) variety, aimed at certain targets. Pfizer will select 15 targets on which the therapy will be focused on for development and commercialization, as per the terms of the agreement. Cellectis will also choose 4 targets for development, and then, commercialization.

Moreover, the company has also declared to have submitted an application to the US FDA for its vaccine candidate to treat invasive meningococcal disease. The FDA's approval will prove to be a vital advancement for the treatment of the disease, as it is difficult to diagnose and has a high mortality rate as well.

The approval will also open new growth horizons for the company, as the meningococcal vaccines market is expected to reach USD 3.76 billion in 2019 and North America leads the global meningococcal vaccines market.

Expanding Research

Last month, the company inaugurated the opening of its new state-of-the-art research and development site in Cambridge, Massachusetts. According to the president of Worldwide R&D of the company, "The new Kendall Square presence in Cambridge represents an important milestone in Pfizer's approach to creating a sustainable R&D engine that is designed to yield a flow of innovative therapies year after year".

Valuation Insight

Source: MSN Money

Following the lower reported profit announcement and the patent expiry of Viagra in China after Europe and South Korea, the investor reaction has been quite sharp, resulting in a decrease in share price. This can also be witnessed by analyzing the company's forward P/E ratio compared to its peers. Further, the stock is trading at a P/B of 2.5x, as compared to the industry average of 3.9x. The stock is undervalued, and this can be a cheap entry point for long-term investors as the company's research efforts start bearing fruit. Therefore, I recommend buying the stock.

Source: Pfizer: Struggling Through A Tough Time