Drug Drop Slams Pfizer

"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).