Since Merck's ( MRK) Zocor lost patent protection in June 2006, generic versions of the cholesterol fighter have been taking pieces out of Lipitor's U.S. market share week after week.

Lipitor's importance to its maker, Pfizer ( PFE), is readily apparent -- not only is it the company's biggest product, it's also the world's top-selling prescription drug. The continuing challenge is beating back increasingly fierce competition.

"Pfizer is in a tough spot," says Joseph Tooley of A.G. Edwards. "Generic Zocor is a game-changer. It's growing at a rapid pace."

For the four weeks ended June 1, Lipitor had a 32.7% market share of U.S. prescriptions, down from 40.9% a year earlier. Generic Zocor now has a 23% share, according to a recent report from Tooley's firm, citing data from the medical-products-tracking firm IMS Health.

At the same time, Lipitor's dominance is shrinking while the total market is growing. U.S. prescription volume rose 10.3% in the past year, but Lipitor's volume dropped 12%.

Pfizer has regained a tiny amount of lost prescriptions thanks to Caduet, which combines Lipitor and the blood-pressure drug Norvasc. Still, Caduet's market share is up to only 1.6% from 1.2% a year ago.

"Caduet appears to be gaining some traction," says Tooley, noting that the drug remains a small player. Tooley, who doesn't own shares, has a hold rating on Pfizer. His firm has had a recent noninvestment banking relationship with the drugmaker.

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Though it causes enough trouble on its own, generic Zocor isn't the only problem for Lipitor. Generic versions of Bristol-Myers Squibb's ( BMY) Pravachol now have a 4.5% market share, up from 3.9% a year ago. Generic copies of Mevacor, an older Merck drug, control 8%.

Brand-name drugs are taking their toll, too. Schering-Plough's ( SGP) Zetia has 8.2% of total prescriptions, up from 7.7%. Vytorin, which combines Zetia and Zocor, is up to 10.9% from 9.5%. AstraZeneca's ( AZN) Crestor holds 7.8% of the market, a percentage point better than last year.

All of this weighs heavily on Pfizer because Lipitor was responsible for 27% of its total revenue in 2006, with the U.S. accounting for $7.85 billion of the $12.89 billion in worldwide sales. During the first quarter this year, Lipitor's worldwide sales rose 8% year over year to $3.36 billion, including $2.13 billion from the U.S.

Pfizer always knew that generic Zocor would create a hazard. Pharmacy benefit management firms and health maintenance organizations are steering customers to the generics that they maintain are therapeutically similar.

"There are incentives for companies and patients to reduce costs," says Les Funtleyder, a health care analyst at the institutional trading firm Miller Tabak. "It's a natural progression of the way health care works -- to lower-cost options." Funtleyder, who doesn't own shares, is neutral on Pfizer. His firm doesn't have a financial relationship with the company.

Pfizer faces a daunting task because generic Zocor is now sold by 11 companies, and that means intense price competition. Customers of course find the idea of paying less hard to resist.

A recent Bear Stearns report says the annual wholesale acquisition cost for generic Zocor is $20 to $58 depending on the dose. The annual cost for Lipitor is $874 to $1,246. The wholesale acquisition cost is the list price charged by drugmakers to wholesalers or direct purchasers, excluding discounts or rebates. Meanwhile, the annual cost is $913 for Zetia, $983 for Vytorin and $945 for Crestor.

Pfizer has two ways to defend Lipitor. It can cut prices and offer rebates to protect its prescription-market share, or it can raise prices to prop up revenue as prescriptions slip.

For now, it's doing both. In January, it raised Lipitor's price by 5%, and Pfizer attributed its first-quarter sales gain from the product to the price hike.

On May 30, it also signed a deal with Express Scripts, ( ESRX) to offer rebates on Lipitor. In return, the giant pharmacy benefits management firm placed Lipitor back on its list of preferred brand-name drugs, meaning its customers will pay less out of pocket.

Managed care firms usually have three tiers of products. Generics, which require the lowest copayments, are in Tier 1. Preferred brand-name drugs are in Tier 2, and nonpreferred drugs are in Tier 3 and carry the highest copayments.

Lipitor was pushed off Tier 2 in January 2006 when Express Scripts encouraged customers to use Zocor. At the time, Zocor was still protected by patent, but Express Scripts wanted patients to become accustomed to Zocor before it went generic. Express Scripts said this plan enabled customers and patients to save $230 million from January 2006 to April 2007 by choosing generics over brand-name cholesterol drugs.

A recent report by UBS Securities notes that Lipitor "lost more ground" at Express Scripts than it did nationwide during the past 15 months. One-third of those lost prescriptions shifted to generic Zocor and the rest to other brand-name drugs.

Pfizer and Express Scripts didn't reveal the terms of their agreement, which took effect June 1. "Customers will get a better price for Lipitor," says Tooley of A.G. Edwards, adding that Express Scripts can still encourage people to seek generics.

"It's going to be an upstream battle for Pfizer to maintain prescription volume," says Funtleyder, who predicts U.S. prescriptions "will drift lower."

The latest data don't reflect Pfizer's announcement last week that it made a statistical error when it claimed Lipitor "significantly reduced the risk of serious cardiovascular events" compared with Zocor based on a review of 80,000 patients.

Pfizer said a "subsequent review" of the data showed that a 10% reduction in cardiovascular risk for Lipitor wasn't statistically significant. Initially, Pfizer said there was a significant 14% risk reduction. The evaluation looked at patients three months after they took Lipitor and Zocor until they were hospitalized with heart problems or stopped taking the drugs.

Another analysis compared Lipitor and Zocor patients from the first day they started taking the drugs. At first, Pfizer said Lipitor produced a 26% risk reduction. Last week, it lowered the rate to 22%, saying that both figures are statistically significant.