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Drug Drop Slams Pfizer

Robert Steyer

Pfizer's(PFE Quote) shares plunged Monday as investors reacted with fury to the company's decision to stop working on a cholesterol drug that had been viewed as the foundation for the years ahead.

In a staggering setback for its research efforts and an ominous warning about future sales and earnings growth, Pfizer said Saturday night that it would halt development on torcetrapib because more deaths than expected occurred in a big clinical trial.

Shares of Pfizer dropped $2.96, or 10.6%, to $24.90 in extremely heavy trading. The stock sank as low as $23.50. Nearly 290 million shares changed hands, roughly nine times the average volume.

Following Pfizer's announcement, several Wall Street analysts reduced their ratings on the stock, and Moody's placed the drug giant's Aaa long-term debt grade on review for a possible downgrade. Aaa is Moody's highest rating.

The stunning announcement from Pfizer came only two days after executives met with analysts and said they expected to seek regulatory approval for torcetrapib in the second half of next year if a series of clinical trials proved successful. Results had been scheduled for late March.

These trials had different goals than the one that led Pfizer to cancel its work on torcetrapib. They were focusing primarily on how well a combination of torcetrapib and Lipitor acted on cholesterol and reduced artery-clogging plaque, a major cause of heart disease and heart attacks. The tests compared the combination pill to Lipitor, the world's best-selling drug, on its own.

The massive 15,000-patient test that triggered Pfizer's decision this past weekend pitted the combination pill against Lipitor to determine if the combined drug reduced the risk of heart attacks and heart disease. The trial also compared strokes and the need for patients to undergo heart bypass surgery or to receive stents.

Major Setback

CEO Jeffrey Kindler called the results "surprising and disappointing." Pfizer terminated its research in "the best interests of patients and making sure all this information is communicated to appropriate medical and regulatory authorities as quickly as possible," he said in a prepared statement.

"We understand the challenge that this represents and we will respond quickly and aggressively to it," Kindler added. "It is important to put this information in the context of both our commitment to transform Pfizer and our overall product and financial strength."

Pfizer reaffirmed its financial guidance for 2007 and 2008. Revenue in each of those years will be "comparable" to this year's revenue, the company said.

Average earnings-per-share growth, excluding special items, will be in the 'high-single digits' for those years, Pfizer added. But Torcetrapib hadn't played a role in the company's calculations for 2007 and 2008.

"This is, of course, a major setback for Pfizer," says Sagient Research Systems, a San Diego-based firm that tracks drug developments. Sagient, which doesn't own shares of Pfizer or have an investment banking relationship with the drugmaker, had forecast that torcetrapib would have achieved a peak of $5 billion in annual sales in the U.S.

"This is devastating news," Jami Rubin of Morgan Stanley said in a research report. Rubin cut her rating to equal-weight from overweight. "It seriously calls into question Pfizer's outlook for 2011 to 2015," she says. Rubin owns shares, and her firm has an investment banking relationship with Pfizer.

The Big Hurt

The failure of torcetrapib, whose R&D expenses have been at least $800 million, hurts Pfizer in several ways. Pfizer loses a drug designed to raise the level of good cholesterol, one goal for reducing artery-clogging plaque that leads to heart disease and heart attacks.

Pfizer also loses an important component in protecting Lipitor, a source of about one-fourth of the company's revenue. Lipitor helps reduce bad cholesterol, the other key component in keeping arteries clear of plaque danger. However, reducing bad cholesterol can only go so far, and Pfizer was hoping the one-two punch of its combination pill would increase sales of its cholesterol franchise.

Pfizer wanted to win FDA approval for the Lipitor-torcetrapib pill early enough so that the company could begin convincing doctors and patients to switch before Lipitor's U.S. patent expires. The key patent lasts to March 2010, and another patent runs to June 2011.

Without the combination pill, Pfizer faces a major revenue and earnings hit. Lipitor already is facing mounting competition from several brand-name cholesterol drugs from Schering-Plough(SGP Quote), Merck(MRK Quote) and AstraZeneca(AZN Quote).

Lipitor is also under pressure from managed care organizations, which are encouraging doctors to prescribe cheaper generic versions of popular cholesterol fighters from Merck and Bristol-Myers Squibb(BMY Quote). Merck's Zocor and Bristol-Myers Squibb's Pravachol lost U.S. patent protection earlier this year.

Even though torcetrapib created controversy because recent test results revealed some elevation in blood pressure, many analysts viewed it as the biggest thing in Pfizer's near-term R&D efforts. Clinical trials showed the combination pill did a good job of fighting bad cholesterol and raising levels of good cholesterol.

Surprising Results

However, Pfizer cancelled work on its combination pill -- as well as a stand-alone torcetrapib pill -- because an independent data safety monitoring board detected "an imbalance of mortality and cardiovascular events" in the 15,000-patient clinical trial, nicknamed "Illuminate."

Clinical trials have independent units that monitor tests periodically, looking for any unusual negative or positive outcomes. Although these monitoring boards will report such events to the test's sponsor, the company itself doesn't get a sneak peak at the study in progress.

"Based on all the evidence we have seen regarding torcetrapib and in light of prior study results, we were very surprised by the information received from [the monitoring board]," Dr. Philip Barter, director of the Heart Research Institute in Australia, said Saturday. He is chairman of the steering committee overseeing the clinical trial. "We believed that the study was coming along as expected, and this new information was totally unexpected and disappointing, given the potential benefits of this drug."

The clinical trial compared patients taking the combination pill with others taking Lipitor. Barter emphasized that the side effect problem affected only torcetrapib. "Nothing in [Saturday's] information has any impact on the safety or efficacy of Lipitor whatsoever."

In Illuminate, about 7,500 patients got the combination pill, for which there were 82 deaths, and 7,500 patients received Lipitor, for which there were 51 deaths.

The Food and Drug Administration, which said it supported Pfizer's decision, said the data safety monitoring board told Pfizer of the death-rate data early Saturday morning and that the company told the FDA at 4 p.m. that afternoon that it planned to cancel work on torcetrapib.