Pfizer (PFE) has had a very challenging 2012, with the losses of revenue due to patent expirations. I have been very impressed with what I call the creative exploration of the company to replace that income. Let's take a look at some of the ways Pfizer is reinventing itself in a very competitive pharma market.
Cutting Old Alliances
There are companies making arrangements with Indian generic makers because of their low costs at a time when generics are taking a much larger piece of the drug market. This is taking place at the same time Pfizer is building some alliances and nixing others. It ended its relationship with Claris Lifesciences even though the Indian company worked its way back into the good graces of the FDA after a two year ban. It had contamination problems and had made improvements in the plants to the satisfaction of the FDA. In 2010 some of the company's products contained fungus that caused Pfizer to recall some antibiotics and an anti-nausea product contracted out to Claris. This was the latest bridge it burned. It also nixed a multi million dollar deal to sell Bangalore-based Biocon's insulin products in March.
The Focus on Prescription Drugs
Pfizer has long term plans to spend more energies on its pharma industry. It has taken actions to downsize areas including its Capsugel unit, baby formula operations, and it is separating it animal health unit, Zoetis. Along with this the downsizing it has also put together an alliance with Mylan (MYL) that reveals a move toward the generic drug market. Pfizer and Mylan have teamed together to sell 350 patent drugs together in the growing Japanese market. These two make a good team. Pfizer will handle sales and marketing while Mylan takes care of R&D and manufacturing.
This is a great move for Pfizer! The Japanese market is a hot one for generic drugs. Japan is the world's second largest pharma market and 6th for generic drugs. Sales in Japan for the company grew by 6.9% last year while in Europe sales fell 5% and in the U.S. by 7%. Japan is increasingly cost-conscious trying to get cheaper copycat drugs into a market of aging citizens. Regulatory reforms have sped up new drug launches in a market notoriously slow at adopting treatments already in use elsewhere. This aging population makes the region a growing market while others are not doing well.
Pfizer will create new revenue streams in this generic market but it is also exploring another alternative that may also prove profitable over the counter drugs.
Exploring OTC Drug Market
It has been wrestling for some time with the issue of losing patents which will cause continued decline in sales. If you have read anything on Pfizer you will recall that Lipitor alone brought in $11 billion in 2011 and that is out the window. Patent expirations on Viagra, Enbrel, Detrol, among others, in 2012 will also hurt revenues. The OTC market is one option it has turned to besides the generic market in Japan that looks promising. If the FDA makes certain prescription drugs available on the OTC market for chronic conditions, Lipitor could be one of them, as well as Celebrex and Viagra under the new frame work by the FDA.
One move Pfizer made that will bring in revenue is the acquisition of AstraZeneca's rights to OTC Nexium. It agreed to pay $250 million up-front and then royalties. Nexium is expected to be on the OTC market by 2014 and had sales in 2011 of $4.4 billion. With its wide sales network, Pfizer could position itself to tap this expected growth.
The stock appears to be moving sideways right now after moving up in the month of July. It has moved sideways through August and appears to have built a nice foundation of support at about 23.60. The RSI indicator reveals to us that this foundation is a pretty strong foundation too. We can see this because the RSI has remained above the '50' market (the division between bullish and bearish strength) throughout this sideways (or consolidation) period. The MACD Histogram revealed the consolidation before it happened with a negative divergence but it has not support. For this reason it is not a sign of a bearish move, just a slow down in the present trend.
The Options Play
Presently trading at 23.85, I am expecting the stock to continue up from the looks of the formation. The company is putting together some good alliances for future revenue replacement strategies so I think it will move sideways and then continue up before the year's end. I am considering an income play that is bullish but will give me at least 5 to 6 months protection against time decay.
- Buy the January 2013 call with a strike of '24' (priced at $0.95)
- Sell the January 2013 call with a strike of '25' (priced at $0.51)
- Net Debit to Start: $0.44
- Maximum Profit: $0.56
- Maximum Risk: net debit
- Maximum Length of Play: 5 months
Reasoning behind the Trade
- Stock has a good foundation and looks like it will sustain its present position before moving up.