Most people would not buy a generic brand painkiller over a trusted brand like Advil, typically because of the idea that generic brands do not work as well as name brands. It is this idea that leads me to believe that Pfizer (NYSE:PFE) may be safe from the "patent cliff" that so many pharmaceutical companies are currently dealing with. Pfizer is also making enormous moves toward directions that will benefit the company and its stock in the future.
The "patent cliff" is a term used to describe the current phenomenon many pharmaceutical companies are dealing with, expired drug patents. These patents protected the companies' major branded drugs from being replicated by other companies and sold in generic versions for cheaper. With the patents expiring, generic brand drugs are being made and sold, hurting sales of the original name-brand drugs. Watson Pharmaceuticals (NYSE:WPI) released its long-awaited generic version of Pfizer's top-selling drug in the world, Lipitor, late last year, lowering sales of the name brand drug by 1% last year.
After the launch of the generic version of the cholesterol-lowering drug, Pfizer took action to try to protect the sales of its name-brand drug. Pfizer offered discounts to companies that would reject generic prescriptions and substitute Lipitor. I think what Pfizer should do in this situation is lower the cost of Lipitor making affordability less of a perk for the generic-brand drugs. These deals blocked generic makers from mail-order services that accounted for about 40% of all Lipitor prescriptions, but last November, three senators asked Pfizer to detail its agreements due to concern about long-term impacts on employers, Medicare, and healthcare costs. The concern about costs of drugs like Lipitor is not so much that it is pricey, but that patients whose lives are in danger without it, cannot afford it. Many doctors and medical companies are in favor of generic brands of Lipitor because more people will benefit from it, not just save money. While the drug will still be high in demand due to necessity, Pfizer should still consider lowering the price of Lipitor to increase its accessibility to combat generic brands. This would likely increase revenue, allowing the company to capture a greater share of the cholesterol drug market. Lipitor sales have been slipping quickly. First-quarter profits fell 19%. Pfizer took in $1.79 billion in Q1 2012, compared with $2.22 billion during the same quarter last year. If Pfizer lowered the price of Lipitor to compete with generic brands, I think it could net $2 billion or greater going forward.
Other pharmaceutical companies experiencing the fate of the patent cliff are Novartis (NYSE:NVS), Sanofi (NYSE:SNY), AstraZeneca (NYSE:AZN), and Abbott Labs (NYSE: ABT). AstraZeneca also has a name-brand drug called Crestor, for managing cholesterol levels, that is experiencing a decline in sales due to generics like Watson's generic Lipitor drug and Merck (NYSE:MRK), which has a generic version of Crestor called Zocar. The stiff competition is mainly due to pricing, especially with the heavy pressure from insurance companies and the government to lower drug prices. This is why I think the only chance Pfizer has at keeping its sales numbers up is by lowering its price.
Recently Pfizer announced that it would be reducing its research budget by about $2.9 billion, or 30% in the next two years. This cut is risky due to the high demand of medical research and also may hurt its public relations by making it sound like such research is not important. It is also a smart decision as part of a plan to focus on only the most promising areas for a drug breakthrough such as cancer and Alzheimer's disease. Due to the cut back in research, Pfizer has been able to buy back $1.7 billion in stock, and plans to buy back about $5 billion by the end of the year. So far its stock has risen almost 8% in the last year, so, many of its investors are in favor of its new budgeting plan.
Even though it is cutting back on research, it is not fully omitting it from taking place. Pfizer's research budget is still around $7 billion, and showing to be going toward good use. Recent news reported Pfizer's exploratory study that measures the effects of Lyrica (pregabalin) on brain activity in Fibromyalgia patients. A study investigator, Richard E. Harris, Ph.D stated that it was the first exploratory fMRI study to investigate the mechanism of action of Lyrica in humans with fibromyalgia. This study will give Pfizer a large boost in the research realm by providing an explanation not only on how fibromyalgia affects the brain, but also how Lyrica may impact central pain processing pathways in the brain.
Also, considering that Pfizer acquired rights to Lipitor through its merge with Warner Lambert in 2000, and also its other name brand drug, Celebrex through its acquisition of Pharmaca in 2003, I think it is wise for Pfizer to cut back funding for its own research, and in place use it to purchase companies that already have high-demand drugs in production.
Other companies suffering from the patent cliff are cutting back on research as well including, Novartis, and Sanofi. These major drug producing companies are moving into other sectors in an attempt to make up for losses in drug sales such as, generic drugs, medical devices, consumer health products, and animal health. While spreading out opportunities for growth is typically beneficial, these companies still risk competition, not to mention the tax that the Obama Administration is trying to implement on sales of medical devices.
While other companies are trying to expand to keep up, Pfizer is actually getting smaller. Even though Pfizer's nutritional unit grew by 15% and animal health by 17%, it announced that it will be selling its infant nutrition business to Nestlé for $11.8 billion, and will likely sell its profitable animal health business by 2013. Yet, Pfizer should keep its animal health sector since it is the most successful company in animal healthcare. Revenue from the division jumped 4% in the first quarter, with sales reaching $1.03 billion, up from $982 million in the first quarter of 2011.
Overall, I think Pfizer may be slightly hurting now due to the patent cliff, but in the long run, it is tough to compete with the world's number one selling drug along with all of the other big name brand drugs Pfizer produces. I think that from here, lowering the price of Lipitor would help increase the amount of sales of the drug, but the risk is losing profits. Since Pfizer is known as one of the large pharmaceutical companies, I think it was a good decision to sell its infant nutrition business but I don't think it should sell its highly profitable animal health care sector. Cutting research funds is risky, mostly marketing-wise, but with its recent research breakthrough with Lyrica, and proposed focus on important, life-saving drugs, I think it's making the right decision to double down. Pfizer needs to cut back its research on risky and lesser-known diseases, and focus mainly on ones that will lead to a major medical breakthrough. With the revenue Pfizer will be gaining from selling its infant nutrition sector, its decrease in research budget, and general sales from its already well-known products, I predict an overall market value increase for the company this year of about $3, raising its stock value to around $25.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.