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By Steven Edwards

Last year, Pfizer's (NYSE:PFE) patent expired on the best-selling pharmaceutical of all time, Lipitor. But shed no tears for this pharmaceutical giant. Sometime within the next three months, the FDA will likely decide to allow the company to sell tofacitinib as a treatment for rheumatoid arthritis. Previously, an FDA panel voted 8-2 to approve the drug, but the FDA is not obligated to follow the advice of its panels.

The drug will compete with Humira, from Abbott Labs (NYSE:ABT) and Enbrel, which Pfizer actually co-markets with AMGN (NASDAQ:AMGN). Humira is Abbott's biggest selling drug, with sales over $7 billion expected this year. Both Humira and Enbrel are expensive protein drugs that work by inhibiting tumor necrosis factor, an inflammatory agent involved in autoimmune diseases. Tofacitinib, which hopefully will get a more pronounceable trade name, is a small molecule drug with a very different mechanism of action: it inhibits JAK protein kinases, indirectly affecting the regulation of genes involved in inflammation. John Boris, a Citicorp analyst, has predicted that the tofacitinib could generate as much as $1.5 billion in annual revenue. Since they have separate modes of action, tofacitinib will not necessarily cannibalize Enbrel sales; physicians could, in theory, prescribe both.

Tofacitinib is also being investigated for the treatment of psoriasis and inflammatory bowel diseases, which, like rheumatoid arthritis, are auto-immune diseases.

Besides tofacitinib, Pfizer is awaiting approvals for two other drugs: and anti-clotting drug called Eliquis, and bosutinib for the treatment for myeloid leukemia. Eliquis would face competition from drugs that are already marketed, including Xarelto, marketed by Bayer and Johnson and Johnson (NYSE:JNJ) and from (privately owned) Boehringer Ingelheim's Pradaxa.

Pfizer, of course, sells lots of other well-known drugs - Viagra (for erectile dysfunction), Celebrex (for osteoarthritis), Premarin (for symptoms of menopause) and Effexor (an anti-depressant). Besides its prescription drugs, Pfizer sells a number of branded over-the-counter drugs favored by consumers, like Advil, Dristan and Neosporin.

Pfizer also has had several new drugs approved fairly recently. Inlyta, approved on January 27 of this year for advanced renal carcinoma, now competes with half a dozen other drugs. Barclay's analyst Tony Butler has predicted peak annual sales of $600 million. Xalkori was approved for certain patients with non-small cell that have a specific mutation. Prevnar 13, which has been in use as a childhood vaccine, was approved Dec 30, 2011 as a vaccine for pneumococcal pneumonia in patients 50 years or over. Elelyso, which Pfizer had developed with the biotech company Protalix (NYSEMKT:PLX), was approved in May of this year to treat Gaucher's disease, a rare genetic disorder. This was a huge deal for Protalix, since this is its only approved drug, but will not appreciably affect Pfizer's profits as there are only 6000 Gaucher's patients in the U.S.

Although Pfizer has grown in the past through large acquisitions, notably a $68 billion deal to acquire Wyeth in 2009, management has lately been paring down operations that don't fit with its strategy of concentrating on its high margin pharmaceuticals business. In April of this year, Pfizer announced that it would sell its nutritional business, largely focused on baby formula, to Nestle for $11.85 billion. For another $2.38 billion, it sold its Capsugel unit, which makes hard capsules, to private equity firm Kohlberg Kravis Roberts (KKR). And Pfizer is planning to spin off its animal health unit through an IPO.

At its current price, Pfizer is yielding 3.7%, less than other large pharma companies, like GlaxoSmithKline (NYSE:GSK), which pays 4.9% or AstraZeneca (NYSE:AZN), which pays 6.1%. However, Pfizer has bought back over $9 billion of its own shares (about 5% of the shares outstanding) in the last year, while the stock price has increased by a third, so stockholders are not complaining. Among those many stockholders are hedge funds. Pfizer is one of the most popular stocks among hedge funds and the most popular pharmaceutical company.

I like Pfizer's strategy of slimming down to its core pharmaceutical business, even though this increases the risk profile somewhat. Pharmaceuticals are a higher risk business than, say, baby formula, but carry substantially higher profit margins. Because Pfizer is so large, it is able to spread the risk by having a very deep pipeline. Altogether, Pfizer has an impressive 79 drugs in clinical trials for a wide variety of conditions. Pharma companies are sometimes considered defensive plays, because drugs are not a discretionary item, so they profit in good times and bad. Pfizer isn't a high growth stock anymore but it is still a defensive play suitable for investors looking for both yield, and capital gains, with relative safety.

Source: Pfizer Rolls On