When Pfizer ( PFE) serves up its second-quarter financial report on Thursday, it will truly mark a dividing line between the past and the future. The second quarter represents the last three months of sales for Lipitor before the cholesterol-fighter started competing with generic versions of Zocor, the Merck ( MRK) drug that lost U.S patent protection last month, and the final quarter of unfettered revenue for Pfizer's third-best seller Zoloft, the antidepressant whose patent has now expired. At the same time, the sun is setting on the days when Pfizer's nonprescription drugs and consumer products divisions will contribute to earnings.
Pfizer has agreed to sell them to Johnson & Johnson ( JNJ) for $16.6 billion , and the sides expect to close the deal by the end of the year. On Monday, Pfizer said it would treat the consumer products unit as a discontinued operation, a move required by generally accepted accounting principles. While analysts will examine the second quarter's impact on the future, they also want to know specifically about upcoming products. Pfizer executives can expect questions on the marketing and pricing of Exubera, the inhaled insulin developed with Nektar Therapeutics ( NKTR) being launched this month, and they'll likely be pressed for details on the pricing and launch of Chantix , the antismoking drug approved by the Food and Drug Administration in May. Pfizer has said Chantix will be available during the second half of the year. The company will probably also be asked to discuss the cancelled partnership with Neurocrine Biosciences ( NBIX) for the troubled insomnia drug Indiplon , and for an update on torcetrapib, an experimental drug that raises so-called good cholesterol. Torcetrapib is one of the products that Pfizer hopes will mitigate the damage caused by prominent medications losing patent protection. Of course, Lipitor's sales growth will be the primary point for discussion. The U.S. performance of the world's bestselling drug "captures top billing on investors' minds as the key topic for the quarter," Chris Shibutani of JPMorgan wrote in a recent research report. He wonders if Pfizer can fulfill the promise made earlier this year by Hank McKinnell, the chairman and CEO, that Lipitor could achieve at least $13 billion in sales this year. Shibutani forecasts $12.3 billion, or about the same as last year's $12.2 billion.
Shibutani still gives Pfizer an overweight rating thanks to its cost-cutting efforts, smart uses of cash and potential new products. He says negative risks to Pfizer's earnings "should be relatively contained." Shibutani doesn't own shares, but his firm has had an investment banking relationship. What the company needs to do is find additional products in the near future that can offset the sales being lost from big drugs seeing their patents run out, he says. The next major hit comes during the third quarter of 2007, when the blood pressure drug Norvasc, Pfizer's second-biggest seller, loses its U.S. patent protection. Norvasc contributed $4.71 billion in sales last year. Analyst Richard Evans is considerably less enthusiastic, telling clients that generic drugs will force U.S. sales of Lipitor to decline "rather significantly" during the rest of the decade. Evans, of Sanford Bernstein, has a market perform rating on Pfizer. He cut his U.S. Lipitor sales estimate for 2010 to $5.5 billion from $8.1 billion. Evans is concerned about torcetrapib, saying clinical trials showing that it can raise a patient's blood pressure make it vulnerable to similar experimental products that don't have that issue. "If
competitors without blood pressure effects are available, they'll be used preferentially over torcetrapib," Evans wrote in a July 11 research report. He doesn't own shares, but his firm has provided noninvestment banking services. Acknowledging that recent Pfizer actions, such as raising the dividend and repurchasing stock can be viewed as shareholder-friendly, Evans also says "the market remains skeptical regarding returns on cash." With Lipitor under fire and torcetrapib still a question mark, Evans joins the chorus of analysts who say Pfizer still needs more new products. Barbara Ryan of Deutsche Bank Securities says that substituting generic Zocor and other generic cholesterol drugs for Lipitor "is expected to play out over a prolonged period of time."
Merck has fought the expected flood of generic competitors by making deals with several managed-care firms to offer lower-priced Zocor, and Pfizer shareholders will want to see how the price war will affect Lipitor. "The shift in
market share towards Zocor began in early 2006 and will likely continue in the second half of the year and into next year," Ryan wrote in a recent research report upholding her buy rating on Pfizer. She doesn't own shares, and her firm has provided investment banking services for the company. Ryan says potential damage to Lipitor will be cushioned, in part, by Pfizer's cost-cutting, financial management and new products. The 4.1% dividend yield, she says, "limits the downside risk."