Pfizer's a Sell: Shrinking Top Line, No Blockbusters In the Pipeline

We continue to rate shares of Pfizer (PFE) a SELL based on a shrinking top-line and inadequate late-state pipeline. The key event that resulted in our downgrading the rating on Pfizer in December 2006 was the news that management had halted the ILLUMINATE morbidity and mortality clinical trial program on the request of the independent Data Safety Monitoring Board [DSMB].

According to the findings of the DSMB, there was an imbalance in mortality in the Lipitor + torcetrapib arm of the study vs. Lipitor alone. At the time of the DSMB monitoring, 1.1% (82 / 7500) of the Lipitor + torcetrapib group has died compared to 0.7% (51 / 7500 of the Lipitor control group. As a result of this news, Pfizer has decided to discontinue development of torcetrapib.

The discontinuation of torcetrapib is a monumental failure and devastating to the long-term growth prospects of the company. Mega-blockbuster and the world s best selling pharmaceutical product, Lipitor, is set to lose patent protection in March of 2010 outside the U.S. Combining Lipitor with torcetrapib was supposed to maintain the company s leadership position in the cholesterol lowering market. We now expect a slow bleed in Lipitor sales over the next few years before the massive drop in sales begins in 2010. We understand that Pfizer does have backup CETP candidates in the pipeline, but there is nothing significant enough to account for this failure.

Three days prior to the announcement of torcetrapib's discontinuation, Pfizer terminated development of asenapine for the treatment of schizophrenia. Management is battling significant patent expirations and recent high profile pipeline failures, such as asenapine and indiplon. As a result of these failures, Pfizer announced (yet another) global restructuring program at its analyst and investor meeting on January 22, 2007. The company plans to reduce headcount by 10,000 positions (approximately 10%), as well as increase the current Adapt-to-Scale plan by an extra $1.5 to 2.0 billion in cost savings by 2008. However, barring a significant acquisition which is becoming more and more likely Pfizer s top-line will shrink by 2% through 2011. We would avoid the name.

COMPANY OVERVIEW
Pfizer, Inc., the world's largest pharmaceutical company in terms of sales, markets several world s best-selling medicines. The company sells prescription medicines such as Lipitor (for cholesterol management), Norvasc (for hypertension), Lyrica (for CNS disorders), Viagra (for erectile dysfunction), Celebrex (for pain management) and Zoloft (an antidepressant). Additionally, Pfizer develops animal health products, such as Revolution (anti-parasitic). In 2006, Pfizer posted continuing operations of $48.4 billion up 2% from 2005 levels. We expect the company to struggle to post meaningful top-line growth going forward.

The company has nearly $15 billion in patent expirations over the next three years. Pfizer will rely on its expanding its pipeline and heavy cost-cutting to post modest earnings growth over that time. Based in New York, Pfizer employs approximately 100,000 people worldwide. The company has enormous operating cash flow. Pfizer should generate $12.5 to $13.5 billion in free cash flow in 2007. Couple this amount with the $30+ billion in cash on hand, and the company s financial position is unrivaled. Management plans to use this massive war chest ready to do small strategic acquisition, pay off short-term debt, and buyback stock.

Pfizer netted $13.5 billion in cash in late December 2006 when it completed the sale of the Consumer division to Johnson & Johnson (JNJ). New CEO, Jeffrey B. Kindler, commented that all deal sizes are on the table during the recent analyst and investor meeting, but that Pfizer will be strict in looking for strategic fits that can help grow the business i.e. Pfizer is looking for top-line growth through acquisitions, not cost-cutting opportunities.

We believe that Pfizer will continue to make small strategic acquisitions such as it did with Vicuron, Bioren Inc., and PowderMed, or product acquisitions such as the recent deal to acquire Sanofi's (SNY) ex-U.S. Exubera rights or with fesoterodine from Schwartz Pharma in June 2006. We believe the company will seek to expand its biotherapeutics, vaccine, and antibody capabilities over the next several quarters; all while streamlining the entire process and dramatically simplifying the organization structure of its massive R&D operations.

Management will also use the cash to buyback stock. Pfizer has re-purchased $7 billion in stock during 2006, roughly $2.5 billion in the fourth quarter alone. The Board has also authorized $10 billion for 2007. Based on our earnings model, share buybacks will add as much as 3-4% to the bottom-line over the next two years. Finally, Pfizer's current dividend yield is roughly 4.3%. Management raised the dividend by 21% for the first quarter of 2007. The dividend has increased by 18% CAGR over the past 10 years.

Much of the operating cash flow surge at Pfizer is being driven by significant restructuring and cost-cutting potential. Management should be able to turn virtually no top-line growth into 6-8% bottom-line growth starting in 2007 through reducing overhead, streamlining R&D, and repurchasing shares. At the recent analyst and investor meeting in January 2007, the company announced it will expand the existing Adapt-to-Scale [AtS] initiative by an additional $1.5 to $2.0 billion by 2008. New CEO Jeffrey B. Kindler gave an opening speech outlining Pfizer s refocused commitment to streamlining all operations in a goal to make Pfizer a leaner and or agile company.

R&D Expense Reduction
Management's goal is to reduce 2007 total operating expenses (SG&A + R&D) to below that of the 2006 levels by $500 million. Mr. Kindler believes that in 2008 the operating expense lines can be reduced by an additional $1.0 to $1.5 billion. To meet these goals, the company plans to reduce headcount by 10,000 positions (approximately 10%) in 2007, along with closing two manufacturing plants, selling another plant, and closing five R&D facilities around the U.S., Europe, and Japan. Specifically within Europe, Pfizer plans to reduce the field force by 20%. This is beyond the cuts announced in November 2006.

Despite the company's plan to close five R&D facilities in 2007, Pfizer still has the largest R&D budget in the business, and the overall R&D spend will be flat compared to the $7.5 billion spent in 2006. We expect much of the cost savings from closing plants in Brooklyn, NY, Omaha, NE, and overseas will be re-funneled it outsourcing and strategic deal-making. The company is also no stranger to alliances and co-promotions. Alliance drugs, such as Rebif for multiple sclerosis and Aricept for Alzheimer's disease, have contributed nicely to the bottom line. Alliance revenue was up 29% in 2006.

We see new potential alliance drugs coming to market in the next several quarters that will also contribute meaningfully. Specifically, Pfizer and E.U. partner Boehringer Ingelheim [BI] recently filed for approval of Spiriva Respimat in the third quarter of last year. This new, second-generation inhaler provides a new form of inhalation, known as "soft mist," that permits multiple doses lasting around 30 days, rather than a single dose administered by a powder capsule.

Exubera received approval in late January 2006 and launch in the U.S. in September 2006. The drug launched in overseas market such as German and Ireland in May 2006, however sales in the most recent quarter were not meaningful. Pfizer presented data at the American Diabetes Association meeting in June 2006 demonstrating that inhaled Exubera yielded a similar lowering and maintenance of blood sugar levels [AC1] compared to injectable insulin with statistically lower weight gain over a two year period. The 1000+ person phase III trial contained data on both Type-II and Type-I diabetic patients.

Management is currently working on education and training programs that include demonstration of the proper use of the insulin delivery device and product samples for physicians, diabetes educators, and other healthcare professionals. To further support patients and healthcare professionals in the treatment of diabetes and the appropriate use of Exubera, Pfizer is also providing a 24-hour-a-day, 7-day-a-week call center staffed by healthcare professionals. We are excited about the product, but are working down our expectations based on a slower-than-expected ramp. The product is going to require significantly more education and promotion than originally believed. A mass roll-out to the primary-care market recently began. Sales in 2007 should approach $250 million.

Pipeline Candidates
In mid-June 2005 the company agreed to acquire Vicuron Pharmaceuticals for $1.9 billion. Vicuron has two potential $750 million products. These products are antibacterial agent Zeven (dalbavancin) and antifungal agent Eraxis (anidulafungin). The FDA approved Eraxis in March 2006 and Zeven in June 2006. Approval for Zeven is expected later this year. The in-house pipeline should also begin to start showing results shortly. In the second quarter of 2005 the company received U.S. approval for three drugs: Revatio for pulmonary arterial hypertension [PAH], Lyrica as an adjunctive therapy for seizures and neuropathic pain, and ZMax, a single-dose formulation of Pfizer s antibiotic Zithromax.

We believe that Lyrica has multi billion-dollar potential given the very strong ramp seen over the past several quarters. Sales in 2006 were $1.156 billion. Lyrica market share in the anti-epileptic market continues to grow. We estimate share is 16% in Europe and nearly 13% in the U.S. Use in the diabetic peripheral neuropathy [DPN] and post-herpetic neuralgia [PHN] market is surging. Management estimates roughly 30% market share in this large and highly underserved market. In September 2006 Pfizer received an expanded approval for a wider patient population in neuropathic pain in Europe. Lyrica seems to offer significant advantages over the competition. A new fibromyalgia indication (filed in December 2006) could be another billion-dollar driver for this key drug.

The U.S. launch of Chantix (varenicline), an oral nicotinic partial agonist for smoking cessation, came as expected on August 1, 2006. Pfizer recently presented data recently comparing Chantix to Glaxo s Zyban and a placebo. After 12-weeks of dosing, 44% of Chantix patients had stopped smoking compared to 33% on Zyban and 18% on placebo. After a 40-week follow up, more Chantix patients maintained their abstinence from smoking. E.U. approval came in September 2006 and we are looking forward to the roll-out of Champix (ex-U.S. trade name) throughout 2007. Sales of $101 million in 2006 were in-line with expectations. In 2007 this figure could grow to $410 million, potentially eclipsing the billion-dollar market in 2011.

Approval of Sutent came in late January 2006. The label contains data for both malignant gastrointestinal stromal tumors [GIST] and metastatic renal cell carcinoma [RCC]. Data at the American Society of Clinical Oncology meeting in June 2006 demonstrated a 90% improvement in overall survival (10.9 months vs. 5.7%) compared to the standard of treatment for first-line mRCC, interferon alpha. This data should establish Sutent as the clear first-line choice for patients, relegating Onyx and Bayer s Nexavar to second-line therapy. Pfizer even presented encouraging data from a phase II trial testing Sutent in patients with non-small cell lung cancer [NSCLC].

Sutent was the star of the 2006 ASCO meeting in our view. E.U. approval came in July 2006 for 2nd-line use in RCC, and in January 2007 for 1st-line use. Pfizer is aiming to expand the Sutent label into both NSCLC and metastatic breast cancer (recently entered phase III). Sales of $219 million in 2006 were nicely above our forecasts. We see the drug posting sales near $500 million in 2007 and potentially over $1 billion by 2010. Pfizer recently moved a nextgeneration anti-angiogenesis agent, axitinib, into phase III trials for thyroid cancer.

Pfizer filed for approval in both the U.S. and E.U. for Maraviroc, a chemokine receptor antagonist designed to prevent HIV infection. The product is one of the more exciting candidates in Pfizer s late-stage pipeline. The FDA has granted this candidate fast track status earlier in 2006. Pfizer also recently announced plans to establish a multi-national Expanded Access Program [EAP] to make the investigational CCR5 antagonist maraviroc, currently in ongoing phase III clinical trials, available to HIV/AIDS patients with CCR5-tropic HIV-1 who have limited or no approved treatment options due to resistance or intolerance.

Pfizer presented encouraging data on maraviroc at the 14th Conference on Retroviruses and Opportunistic Infections [CROI] demonstrating after 24 weeks of treatment, approximately twice as many patients on maraviroc (plus backbone) achieved undetectable virus in the blood vs. backbone alone. Patients also saw an increase in CD4 cells nearly twice that seen in those receiving optimized regimen alone. If approved later this year, maraviroc would be the first new oral class of HIV medicines in more than a decade.

Other interesting candidates that could launch beyond 2007 are ticilimumab, a monoclonal antibody anti-CTLA4 receptor antagonist that may offer an important new option for treating metastatic melanoma, and ProMune, licensed from Coley Pharmaceutical Group, in two phase III trials for non-small cell lung cancer [NSCLC]. In another licensing deal, Pfizer acquired the worldwide rights to fesoterodine from Schwartz Pharma AG in June 2006 for $100 million. Fesoterodine is under regulatory review in the U.S. and E.U. for the treatment of overactive bladder. A decision is expected very shortly. Pfizer s experience in this field with Detrol XL should help drive fesoterodine sales to the $400-500 million range by the end of the decade.

INVESTMENT STORY
The torcetrapib news is devastating On December 2, 2006, Pfizer Inc said that in the interests of patient safety it is stopping all torcetrapib clinical trials, including the ILLUMINATE phase III program that has enrolled 15,000 patients. The company was informed that the independent Data Safety Monitoring Board [DSMB] monitoring the ILLUMINATE morbidity and mortality study for torcetrapib recommended terminating the study because of an imbalance of mortality and cardiovascular events.

According to management, 1.1% (82 / 7500) of the Lipitor + torcetrapib group has died compared to 0.7% (51 /7500 of the Lipitor control group. As a result of this news, Pfizer has decided to discontinue development of torcetrapib. Management previously spoke about the candidate as recently as two days before this news as the, most important new development in cardiovascular medicine in years. We had previously viewed torcetrapib as the main reason to continue to own Pfizer s stock despite the recent high-profile failure of indiplon and most recently asenapine. Torcetrapib was designed to extend Pfizer s leadership position in the cholesterol market beyond the patent expiration of Lipitor in March 2010.

We modeled over $3 billion in torcetrapib sales in 2010. We now see earnings growth beyond 2009 as unlikely. Barring a significant acquisition which is becoming more and more likely Pfizer s top-line will shrink by 2% through 2011. Additionally, Pfizer could be in for a significant earnings decline in 2011 when Lipitor going generic. and there are other reasons to be concerned Pfizer is entering a challenging operating period over the next several quarters. Key drugs such as Neurontin, Zoloft, Zithromax, Diflucan, Accupril, Norvasc and Zytrec will all face generic competition by 2007. The company will lose patents on over $15 billion in pharmaceutical sales the next three years.

Pfizer is entering a challenging operating period over the next several quarters. Key drugs such as Neurontin, Zoloft, Zithromax, Diflucan, Accupril, Norvasc and Zytrec will all face generic competition by 2007. The company will lose patents on over $15 billion in pharmaceutical sales the next three years.

Additionally, drugs still on patent such as Viagra (erectile dysfunction) and Zoloft (anti-depressant) face tough competitive threats. Cialis (Lilly) has taken significant market share from Viagra. Likewise, Zoloft growth is slowing due to generic alternatives for competing products such as Prozac (Lilly), Paxil (Glaxo) and Celexa (Forest Labs). Zoloft is now off patent in the U.S. and several generics are already available. The fourth quarter of 2006 was the first full quarter of generic Zoloft. We expect sales to decline by roughly 75% year-over-year in 2007. Pfizer s leading antibiotic, Zithromax, saw sales decline by 25% in 2006 based on the availability of generic alternatives in the oral form. We are concerned that gross margin will contract over the next several years due to the loss of these key patents and the effect on Pfizer s pricing power.

However, the biggest concern is a slowdown to mega-blockbuster Lipitor. Lipitor sales have been difficult to predict over the past several quarters due to wholesaler inventory fluctuations and mounting clinical data from Merck and AstraZeneca on their competing agents Vytorin and Crestor, respectively. Sales of $12.871 billion were up 5% in 2006, but shy of management s $13 billion goal. Yet, despite the 5% growth in 2006, prescription trends were actually down 1% year-over-year, with growth driven primarily by price increases and lower rebating thanks to lower tier formulary coverage on most major plans. We think this is a strategy that will be hard to maintain now that Zocor is widely available generic throughout the U.S.

As Goes Lipitor, So Goes Pfizer
For the full year 2007 we see global Lipitor sales of around $12.8 billion, down about 1% from 2006. Longer term we are concerned that the franchise has peaked. Recent positive data on chief competitors Crestor (AstraZeneca) and Vytorin (Merck/Shering-Plough) at the American College of Cardiology [ACC] meeting in March 2006 seems to have swayed prescriptions away from Lipitor. Still, management continues to push the lower is better marketing campaign with data presented at the European Stoke Congress earlier this summer from the Stroke Prevention by Aggressive Reduction in Cholesterol Levels [SPARCL] trial demonstrating Lipitor's benefit in reducing stroke in at risk patients by lowering the cholesterol levels to recommended targets.

In March 2007 the company even gained five additional labels for Lipitor to include reduction in risk of nonfatal heart attacks, fatal and non-fatal strokes, certain types of heart surgery, hospitalization for heart failure, and chest pain in patients with heart disease. The strategy is to differentiate Lipitor. However, this is a strategy that may be hard to maintain by Pfizer because both Crestor and Vytorin seem to offer superior efficacy. We see a slow bleed in Lipitor sales starting in 2007 before a massive decline in 2010 (Canadian patent expiration).

Finally, we are disappointed with some recent high profile pipeline failures in the central nervous system [CNS] category. In May 2006 the FDA failure to approval insomnia drug indiplon forced Pfizer to discontinue development with Neurocrine Biosciences. This news removed a potential blockbuster drug from the pipeline. In November 2006 management discontinued development of atypical antipsychotic, asenapine, partnered with Organon Pharmaceuticals. This removed another potential blockbuster drug from the pipeline. Pfizer's CNS franchise has been significantly impacted with the loss of exclusivity on Zoloft and the failure of these two candidates.

Meanwhile, other candidates such as Geodon will peak out by the end of the decade. Asenapine and indiplon were supposed to be the next big blockbusters for Pfizer s sales force to promote. Along with torcetrapib, the recent decision to cut headcount by 10% was made because of a shrinking CNS pipeline. The category remains a significant need for Pfizer and we would not be surprised to see the company make a sizable acquisition in this area. Some potential names what may help beef up the pipeline are Forest Labs, Sepracor, Acadia Pharmaceuticals, Acorda Therapeutics, Somaxon Pharmaceuticals, or Arena Pharmaceuticals.

Why We Are Avoiding Pfizer
Much of the future growth in our view will be based on streamlining R&D processes and consolidating manufacturing plants around the world. Pfizer will realign its enormous global sales force in an attempt to increase productivity and reduce attrition. The company plans to focus more on Medicare formularies given the ever growing Medicare / Medicaid customer base. Products such as Lipitor, Celebrex, and Viagra are seeing a sizable increase in these covered patients. The new R&D focus will attempt to funnel dollars toward projects with higher reward, while reducing overlapping clinical activities.

For example, Pfizer is stopping discovery projects in dermatology and gastroenterology. In our view, Pfizer is attempting to become more biotech-like in its R&D approach, rather than the shotgun approach of the past. This is evident by the significant increase in the number of biologic products in mid-to-late stage development. This is clearly a positive. Mr. Kindler spoke extensively at the recent investor call about removing bureaucracy and making Pfizer quicker and more agile. This is, in our opinion, one of the reasons biotech has been outpacing pharma over the past several years in bringing new drugs to market.

Yet, as big as Pfizer's pipeline is, there are few mega-blockbusters in waiting. Drug such as Sutent and Exubera will eclipse $1 billion in peak sales, but Pfizer needs half-a-dozen of these drugs just to account for the decline in sales of Zoloft, Zithromax, Zytrec, and Norvasc. The aforementioned four drugs delivered total sales of $11.3 billion in 2005 and $9.2 billion in 2006. Based on our model, the same four drugs should only post sales of $2.9 billion in 2008.

That $8.0 billion in lost sales cannot easily be made up. The five new drugs Pfizer plans to launch in 2006 (Exubera, Sutent, Chantix, Eraxis, and Zeven) should post sales of only $2.0 billion in 2007 based on our model. We are on the low-end of the forecast for Chantix and we have pushed back our forecasts for Exubera. However, most devastating is the remove of both asenapine and torcetrapib from our long-term model.

This company is desperately in need of new blockbuster drugs. Enter the $17 billion in cash earmarked for product in-licensing and M&A over the next two years. Pfizer needs to get its pipeline in order, because the net $8 billion it will lose in by 2007 is just the tip of the iceberg. Mega-blockbuster Lipitor will lose its patent in 2010 (Ex-U.S.). This will put 25% of the top-line at risk.

We believe that Pfizer just does not offer investors much growth over the next several years. Remember, the topline grew only 2% in 2006. Our earnings model predicts -2% [CAGR] top-line growth and 3% [CAGR] bottom-line growth through 2011. The additional bottom-line growth will be driven by cost-cutting through the Adapt to Scale initiate and share buybacks.

Share buybacks will add 3-4% to the bottom-line in 2006. Obviously, share buybacks and closing out-dated manufacturing plants will certainly help improve profit margins, but historically speaking, investors have paid less (i.e. applied a lower Price/Earnings ratio) for this type of manufactured growth. This significantly limits the upside in our view.

RECENT NEWS
March 7, 2007: Pfizer announced today that the FDA has approved Lipitor to reduce the risk of nonfatal heart attacks, fatal and non-fatal strokes, certain types of heart surgery, hospitalization for heart failure, and chest pain in patients with heart disease. Lipitor is the first cholesterol-lowering medication to receive FDA approval for the reduction of the risk of hospitalization for heart failure. This new approval expands the use of Lipitor to patients at high risk for cardiovascular events because of established heart disease such as prior heart attack, prior heart surgery, or chest pain with evidence of clogged arteries. Previously, Lipitor was approved to reduce cardiovascular events in patients without heart disease.

March 2, 2007: A retrospective analysis of a large U.S. managed care database showed that patients who took Pfizer's cholesterol-lowering medicine Lipitor had a significant 14% reduction in the risk of cardiovascular events, including heart attacks and strokes, compared with patients who took Zocor (simvastatin).

March 1, 2007: At the 14th Conference on Retroviruses and Opportunistic Infections [CROI] Pfizer presented pivotal data on maraviroc, a new treatment for patients infected with HIV. A 24 week analysis showed that approximately twice as many patients receiving maraviroc with an optimized background regimen achieved undetectable virus in the blood than if an optimized regimen was given alone. In addition, patients receiving maraviroc and an optimized regimen saw an increase in CD4 cells nearly twice that seen in those receiving optimized regimen alone. Adverse events in the group receiving maraviroc plus an optimized regimen were similar to those receiving an optimized regimen alone when adjusted for duration of exposure. If approved, maraviroc would be the first new oral class of HIV medicines in more than a decade.

February 27, 2007: Pfizer Inc said today that a federal court in the Western District of Pennsylvania (Pittsburgh) has upheld the company's U.S. patent covering the active ingredient in Norvasc, the world's most-prescribed branded medicine for treating hypertension. The patent had been challenged by the generic manufacturer Mylan. February 13, 2007: Pfizer announced today that marketing authorization applications for maraviroc will receive accelerated review in both the United States and Europe. Accelerated reviews are granted to potential medicines that, if approved, would represent significant improvements over current therapies. Source: Pfizer Inc.

VALUATION
Price to Earnings, or P/E, is a common ratio used to value pharmaceutical stocks. At the current level, Pfizer is trading at only 11.5x our 2007 EPS estimate of $2.20. This is below the peer-group currently trading at around 14.5x 2007 group EPS. However, we would caution investors looking to pick up Pfizer at a discount that the company also possesses a 4-year CAGR well below the peer-group. Our 2011 EPS estimate is only $2.39. We see Pfizer s CAGR at 3% through 2011, below the peer-group average of around 6.5%. One final note to mention with regard to long-term EPS growth, 2011 should also be a very challenging year for Pfizer as Lipitor's patent will expire in Canada mid-way through 2010.

We believe that growth investors seeking to play large-cap pharma or biotech can probably find better alternatives to Pfizer. Comparatively speaking, almost all large-cap biotechnology stocks offer a 3-5 year earnings growth rate superior to that of Pfizer s. From a financial standpoint, however, Pfizer is unrivaled in the industry. The company should generate near $13 billion in operating cash flow this year. The company has over $30 billion in cash on hand. This cash could be used for more strategic acquisitions to drive much needed growth. Lipitor sales alone will total nearly $13 billion in sales this year. That s larger than biotech companies Genentech or Amgen s entire product suite. What Pfizer does with this enormous cash flow is the big question.

Large pharmaceutical mergers have had mixed success over the past several years. Pfizer s previous acquisition of Warner-Lambert and Pharmacia brought in mega-blockbusters such as Lipitor, Celebrex and Norvasc. Yet, now the company is reducing headcount and closing manufacturing facilities. The adapt-to-scale initiative was put into place because Pfizer became too bloated and too dependent on acquisition for growth. On the other hand, the internally developed pipeline has had little success, so we are unsure where the company can turn now. We do not believe doing a large-scale big-pharma acquisition is the best choice. Getting bigger is not something Pfizer needs to do. The company is already too big to grow the way it used to. Yet, with the internal pipeline failing, Pfizer must turn to its enormous cash flow to acquire growth. Enter biotechnology acquisitions a fragmented and highly speculative long-term strategy.

We believe all the challenges outlined above make Pfizer an average stock at best. In the mean time, the failure of torcetrapib will echo through the income statement well past 2010 when Lipitor goes generic. Until we see a sound strategy to turn this company around, we would avoid the name. The Lipitor patent expiration in March 2010 is bearing down on management like a freight train, and torcetrapib was their best chance to get out of the way. Our rating is SELL, with a price target of $22.

We continue to rate Pfizer a Sell based on a shrinking topline and weak late-stage pipeline. The discontinuation of leading pipeline product, torcetrapib, was devastating to Pfizer s top- and bottom-line growth prospects beyond 2010. Pfizer announced (yet another) major restructuring and cost cutting initiative in early 2007. We do not find cost-cutting and share buybacks as a viable long-term growth strategy. The company will probably seek to do multiple deals in the pharma and biotech industry in 2007. The risk of over-paying or failing to successfully integrate on these acquisitions is high. In our view, the stock does not become attractive on a dividend and cash flow basis until the low $20s per share.

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