Agony From Lipitor's Expiration Won't Be Exclusive To Pfizer

Oct. 10, 2011 4:18 PM ETPfizer Inc. (PFE)AZN, BMY, LLY, MRK7 Comments
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Many healthcare investors are worried about patent cliffs that may have severe repercussions for pharmaceutical companies in the coming years. On November 30th, the best selling drug of all time loses its exclusivity in the United States. The drug I'm referring to is, of course, Lipitor (Atorvastatin). While this is absolutely great news for patients who are at high risk for heart attack and/or stroke, the Lipitor division at Pfizer (NYSE:PFE) will not be having a merry Christmas.

Part 1: How Much Damage Will Generic Lipitor Do To Pfizer?

Lipitor has already seen expirations for certain countries in 2010. Pfizer has already lost exclusivity in four countries: Canada, Spain, Brazil, and Mexico. Pfizer has been able to offset these losses to some degree with more recent FDA approvals, but it's still arguable whether or not Lipitor's loss of exclusivity in the US on November 30th has been fully priced into the stock.

Lipitor's total sales revenue in Q2 2010 was 2.8 billion dollars. As of Q2 2011 it decreased to 2.6 billion - going about 7% lower. After generic competition comes into play you can expect operating income from the Lipitor division to fall quite drastically due to competition. The company ultimately stands to lose about 10 billion dollars a year worth of revenue (or ~2.5 billion every quarter). This is about 15% of Pfizer's total revenue. Yes, this is a lot of potential damage - but not only has the market braced for this, Pfizer has too.

In response to its future competition, Pfizer has ramped up R&D and development of its pipeline. R&D spending has increased 3% from Q2 2010, now at a whopping 2.2 billion dollars. The company is now undergoing FDA registration for ten new drug treatments; including Pristiq (for Vasomotor Symptoms of Menopause), Viviant (for Osteoporosis), Celebrex (for pain) and a host of others. While it's unlikely that any of these will come close to Lipitor in sales, the sheer number of drugs Pfizer has to look forward to is staggering.

Pfizer is trading at a P/E multiple of 17.3 for the time being, and has a generous 4.3% yield. It can be inferred that broader stock market conditions are heavily favoring the non-cyclical companies, as Pfizer along with other big healthcare names are much more expensive than the beaten down equities in sectors like energy and technology. Still, Lipitor's expiration presents a serious threat to Pfizer's revenue. While the short-term picture may look quite bad for the company, I think the pipeline could compensate in the medium to long term quite well.

In addition to the 10 treatments undergoing FDA approval, Pfizer has a whopping 25 drugs in Phase 3 trials in a healthy variety of pharmaceutical subdivisions. It's still one of the riskier bets in healthcare right now due to short term uncertainty, but Pfizer could have a few good surprises down the road with it's big pipeline. In addition, not all is lost for the Lipitor division. The company hopes to market an over-the-counter version of Lipitor, although it may be difficult to get FDA approval. In conclusion, if you believe in the current pipeline, Lipitor won't make a dent in the long-run prospects of Pfizer. If you don't, then yes, Lipitor will do some major damage.

Part 2: The Invasion of Low-Price Atorvastatin

As patients grow more cost-conscious over time, they will probably take the time to select the best drugs that fit their needs. Statins are a commonly prescribed type of medication for those at risk of heart attack and stroke. They act through a biological mechanism that shuts down liver production of cholesterol. Pfizer’s Lipitor was a particularly effective statin, which was a big reason that its revenue performance was so stellar. The largely untold side of the Lipitor expiration story is the fallout that will hit other pharmaceutical companies manufacturing their own expensive statins (their own “Lipitors” if you will).

AstraZeneca (AZN) is the most vulnerable. Its drug Crestor (rosuvastatin) is Lipitor’s arch-rival, but is arguably “better” than Lipitor for a few reasons. Crestor is approved to slow atherosclerosis, and has had slightly better results in some studies; but for the practical purposes of most people they are identical. As the price for Lipitor reaches generic-levels in December, it is very possible that more people will opt for the cheaper option given the bad economic situations that many older Americans are in. Crestor represents almost 20% of AstraZeneca’s pharmaceutical sales in terms of revenue, so AZN shareholders should be wary of the situation.

Next in line is Lescol, Novartis AG’s (NVS) statin. Revenue from Lescol isn’t very big to begin with, sitting at 436 million for the year of 2010. This is only about 3% of Novartis’ net sales, but there's still potential for a dent on the company’s forward earnings. Lescol is expected to expire in 2012, but Novartis will probably see deterioration of Lescol sales sooner than expected.

These were but two examples of companies that would be affected by Lipitor’s expiration, but the theme is continuous for all the statins (even ones that already have generic competition). When people in need of a statin are looking for a drug, they will see the praised Lipitor (atorvastatin) available on the cheap. I wouldn't be surprised to see Lipitor do even better in terms of sales numbers as our population ages and the drug gets cheaper.

Pitavastatin (sold as Livalo) by Eli Lilly is another drug that could see decreased sales figures due to Lipitor's expiry, even if it's patent expiration isn't until 2015. Due to preexisting generic competition, Merck (MRK) and Bristol-Meyers Squibb (BMY) should be relatively unaffected with their expired Mevacor and Pravachol patents, but more crowding in the generic market could indeed diminish sales.

In conclusion, Pfizer is certainly in trouble with the Lipitor expiration but has a host of drugs that could make up for the lost revenue. AstraZeneca will suffer more than expected due to the deterioration of Lipitor-rival Crestor. The revenue lost by other companies will probably not be as significant, as Lipitor and Crestor dominate the world of cholesterol statins for now. Cheap Atorvastatin could be a huge catalyst for price reductions across the board in the statin medication market. A great event for patients, a sad event for big pharma.

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

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