Pfizer's Worst-Case Scenario

This column was originally published on RealMoney on Dec. 4 at 2:04 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

In a surprising turn, Pfizer (PFE Quote) released the news over the weekend that it was discontinuing its lead pipeline project, torcetrapib, an HDL-raising cholesterol treatment.

This project was in development for use with Pfizer's largest franchise, Lipitor, which lowers LDL cholesterol levels. This combination treatment was expected to help the company preserve its industry-leading share of the cholesterol-drug market and its $13 billion Lipitor franchise through the expiration of its patent in 2010.

The company has second-generation HDL-raising projects further back in development, but the timing of these and other pipeline projects is unlikely to replace this lost opportunity. It now faces a much more difficult course over the next several years.

Significant growth challenges lie ahead of Pfizer, so I don't believe there's an urgent need to gain exposure to the stock now. Instead, I'd carefully evaluate the company's strategic actions or acquisitions as they play out over time.

What Happened

Pfizer's discontinuation of the torcetrapib project was due to the recommendation of an independent data-safety-monitoring board, on the basis of higher incidences of death in a 15,000-patient trial. The data showed about a 60% higher adverse-event rate in the torcetrapib/Lipitor arm compared with the use of Lipitor alone. Although torcetrapib had previously been known to cause elevated blood pressure, the seriousness of the new data was quite surprising.

The timing of this news was equally surprising, as Pfizer held an extensive R&D meeting just last Thursday, in which management touted the intended safety studies likely to get torcetrapib approved.

Pfizer shares are sliding on this disappointing news, but I expect the downside to be contained by its lowly share valuation (13 times 2006 earnings) and exceptional cash-flow-generating capabilities in the near term. This includes the potential use of a $17 billion share-repurchase program, a possible dividend hike to support the stock price and new product acquisitions.