Shares of Pfizer ( PFE) continued sinking Tuesday as investors remained lukewarm about the drug giant's massive makeover. By late afternoon, shares were off 74 cents, or 2.8%, to $26.21. On Monday, the stock dropped 1% after Pfizer said it would
fire 10% of its worldwide staff, or about 10,000 people, by the end of 2008. Pfizer also reported fourth-quarter and full-year 2006 earnings that narrowly beat Wall Street estimates. Most analysts with buy ratings stood their ground, and those with neutral ratings remained on the fence. But Bear Stearns analyst John Boris dropped his rating to peer-perform from outperform. Boris' enthusiasm has waned due to what he says is greater pressure on Lipitor as insurers and pharmacy benefit management companies press doctors and patients to take generic cholesterol drugs, most notably cheap versions of Merck's ( MRK) Zocor. Consolidation among PBM companies and a greater push for Medicare recipients to choose generic cholesterol drugs would expand pressure on Lipitor's sales, Boris says in a research note. Generic Zocor costs 5 cents to 16 cents a day, while Lipitor's daily cost is $2.39 to $3.41, he says. Although Lipitor produced a 6% sales gain to $12.89 billion last year, fourth-quarter sales dropped by 1% worldwide and 6% in the U.S. Pfizer executives forecast modest worldwide sales growth for Lipitor this year, but Boris expects a 2% total decline and a 5% drop in the U.S. Bear Stearns helped Pfizer sell its consumer products division to Johnson & Johnson ( JNJ) last year.
Boris and other Pfizer watchers say it's not too early to worry about 2010 or 2011, when Lipitor will lose its U.S. patent. Pfizer prevailed in a patent suit involving India's Ranbaxy Laboratories for the basic patent that expires in March 2010, and an appeals court
recently upheld Pfizer's victory. However, Ranbaxy last year won a challenge to a patent on a calcium salt of Lipitor. This patent expires in June 2011. Pfizer executives said this week that they will petition the U.S. Patent and Trademark Office to correct what they call a "technical defect" in the calcium-salt patent. Pfizer says it lost the patent challenge because of the technicality. Although Pfizer predicts sales growth will resume in 2009 and 2010 after a flat performance between 2006 and 2008, many analysts worry that Pfizer lacks the firepower to offset a generics attack on Lipitor, which represents more than 25% of revenue. That's one reason why the number of buy ratings has declined to seven from 12 in the last three months, while the number of hold recommendations has climbed to 16 from 10. "Pfizer's pipeline is inadequate to paint the company as a growth story or allow it to pay the generous dividend once Lipitor sales are eroded by generics in 2010 or 2011," says Catherine Arnold of Credit Suisse in an analysis of Pfizer's restructuring plans. Arnold is neutral on the stock. Her firm has had a recent investment banking relationship.
Arnold, like Boris, says Pfizer may have to re-enter the acquisition game to help fill what she calls the future "Lipitor gap." Boris says Pfizer may need "a larger strategically driven acquisition," although he didn't suggest a target or a price. Arnold says Pfizer's "next priority should be to buy future growth of lower risk" to offset Lipitor's patent expiration. She also didn't recommend a target. In recent years, Pfizer has signed many licensing and product-collaboration deals, as well as made some smaller acquisitions. The company's management says they're "aggressively pursuing" deals that make strategic sense. The acquisitions of Warner-Lambert and Pharmacia are what got Pfizer where it is today -- big products such as Lipitor and the arthritis drug Celebrex, but also a big staff that Pfizer has been trimming for several years. From a peak of 122,000 employees at the end of 2003, Pfizer's payroll probably will be about 90,000 by 2008, assuming that company doesn't decide that the best way to fill the Lipitor gap is to make another megadeal.