The Birth Control Pill Fiasco: Will It Be Bad For Pfizer?

| About: Pfizer Inc. (PFE)

Pfizer (NYSE:PFE) recently announced the voluntary recall 1 million packs of its oral contraceptive pill, Lo/Ovral 28 (norgestrel and ethinyl estradiol), including 500,000 packs of the generic version of the product. The recall, conducted in the US with the knowledge of the FDA, was due to packaging issues.

What this boils down to is the machines that make the drug messed up the ingredient mixture. Some pills have way too much norgestrel and ethinyl, while others do not have enough of the active ingredient that blocks ovulation.

What it means for women who ingested the packs:

Unwanted pregnancies with women who ingested the placebo type packs is a given. This is certainly is not the worst outcome for some women, but for others, it can be a nightmare after coming to the stark realization the pills they have been taking did not work.

What it means for Pfizer:

In terms of cost impact to Pfizer's current bottom line, not a lot. While it will certainly have some cost impact on Pfizer to get these bad packs out of circulation, this fiasco should not have a significant impact on Pfizer earnings for Q1, 12, if any at all.

In the long term, I do not think it will have much effect on Pfizer stock. After all, Pfizer holds the record for the largest fine ever paid by a large cap pharma. (see below)

Yes, we can expect lawsuits in bundles, and sadly, I am certain many will take advantage of the situation and engage frivolous lawsuits.

Because of the magnitude and scope of this event, I do not expect Pfizer to contest any lawsuit stemming from this. It would just cost too much money to contest any possible frivolous lawsuit. This means Pfizer will fork out gobs of cash in settlements out of court.

Obviously Pfizer has the proper insurance as any large pharma does to cover this type of thing.

Mega-pharmas are used to shelling out gargantuan piles of cash from settlements agreed to and fines levied in the past.

Let's take a look at some of these and the money paid out from them;

Eli Lilly (NYSE:LLY) paid more than $1.4 billion in fines all for various violations for just one drug-Zyprexa. According to The New York Times (January 5, 2007), in 2007, Eli Lilly agreed to pay up to $500 million to settle 18,000 lawsuits alleging patients developed diabetes or other serious side effects after taking Zyprexa. By early 2007, according to the newspaper, Lilly had agreed to pay at least $1.2 billion to approximately 28,500 people who alleged the use of Zyprexa caused them harm.

Novartis (NYSE:NVS)
In 2010, Novartis agreed to a $422.5 million settlement with the Eastern District of Pennsylvania for its off-label promotion of Trileptal and other allegations against Diovan, Exforge, Sandostatin, Tekturna and Zelnorm.

Forest Labs (FRX)
After marketing Levothroid, an unapproved thyroid drug, Forest Labs received a $313 million penalty in 2010. The settlement also covered Forest's off-label use of Celexa for children's use.

Allergan (AGN)
In 2010, Allergan was fined $600 million by the Department of Justice for its off-label use of Botox for headaches, pain management and cerebral palsy.

Elan (ELN)
Elan received a $203.5 million fine in 2010 for its marketing of Zonegran, an epilepsy drug.

AstraZeneca (AZN)
In 2010, the same week as the J&J settlement, AstraZeneca was fined $520 million for misleading doctors and patients about the safety of its antipsychotic drug Seroquel.

Sanofi-Aventis (SNY)
In an agreement with the federal government in 2009, Sanofi paid $95.5 million total, to the federal government, state Medicaid agencies and other public health service agencies, all for its subsidiary Aventis' nasal spray price inflation between 1995 and 2000.

GlaxoSmithKline (GSK)
In 2009, after seven years of off-label promotion on nine of its best-selling drugs, GlaxoSmithKline was ordered to pay $400 million to the U.S. Attorney's office in Colorado.

Obviously these mega pharmas and their stocks are doing just fine these days. Why should we expect any different for Pfizer now?

On Sep 2, 2009, it was revealed Pfizer paid a record $2.3 billion for 'mis-marketing' a number of drugs including Bextra, Geodon, Lyrica and Zyvox. How did that news of that huge pay-out effect Pfizer stock?

Date Open High Low Close Volume Adj Close*
Sep 4, 2009 16.00 16.41 15.99 16.39 29,571,900 14.80
Sep 3, 2009 16.05 16.22 15.95 16.08 35,503,800 14.52
Sep 2, 2009 16.35 16.50 16.13 16.28 39,958,300 14.70
Sep 1, 2009 16.54 16.72 16.25 16.38 39,455,700 14.79

* Adjusted close factors in Pfizer dividend.

We can see there was little to no effect on the Pfizer pps when that huge pay-out was revealed.

We can also see below, when the news broke on this latest setback, the pps remained stable;

Date Open High Low Close Volume Adj Close*
Feb 2, 2012 21.23 21.31 20.80 21.11 57,510,500 21.11
Feb 1, 2012 21.25 21.53 21.20 21.31 44,693,400 21.31
Balance Sheet
Total Cash (mrq): 28.98B
Total Cash Per Share (mrq): 3.77
Total Debt (mrq): 41.05B
Total Debt/Equity (mrq): 45.35
Current Ratio (mrq): 2.25
Book Value Per Share (mrq): 11.71
Cash Flow Statement
Operating Cash Flow (TTM): 21.24B
Levered Free Cash Flow : 17.60B

As we can see above, Pfizer is in good shape.

Many mega-pharmas have been sued and fined, paid out millions, and in a 2 cases, paid out over 1 billion dollars and their stocks and business are doing just fine. If I was holding Pfizer stock, I would not be concerned at this point.

Pfizer should be fine in my opinion. I am not sure I can say that about every woman who was unfortunate enough to have ingested pills from packs that were sold before the recall.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.