Healthy Skepticism Library item: 7120

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Publication type: news

Latwis M.
Pfizer's Worst-Case Scenario
The Street.com 2006 Dec 5
http://www.thestreet.com/_yahoo/markets/activetraderupdate/10325815.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

Abstract:

In a surprising turn, Pfizer (PFE – commentary – Cramer’s Take – Rating) released the news over the weekend that it was discontinuing its lead pipeline project, torcetrapib, an HDL-raising cholesterol treatment.
This project was in development for use with Pfizer’s largest franchise, Lipitor, which lowers LDL cholesterol levels. This combination treatment was expected to help the company preserve its industry-leading share of the cholesterol-drug market and its $13 billion Lipitor franchise through the expiration of its patent in 2010.

The company has second-generation HDL-raising projects further back in development, but the timing of these and other pipeline projects is unlikely to replace this lost opportunity. It now faces a much more difficult course over the next several years.

Significant growth challenges lie ahead of Pfizer, so I don’t believe there’s an urgent need to gain exposure to the stock now. Instead, I’d carefully evaluate the company’s strategic actions or acquisitions as they play out over time.

What Happened
Pfizer’s discontinuation of the torcetrapib project was due to the recommendation of an independent data-safety-monitoring board, on the basis of higher incidences of death in a 15,000-patient trial. The data showed about a 60% higher adverse-event rate in the torcetrapib/Lipitor arm compared with the use of Lipitor alone. Although torcetrapib had previously been known to cause elevated blood pressure, the seriousness of the new data was quite surprising.

The timing of this news was equally surprising, as Pfizer held an extensive R&D meeting just last Thursday, in which management touted the intended safety studies likely to get torcetrapib approved.

Pfizer shares are sliding on this disappointing news, but I expect the downside to be contained by its lowly share valuation (13 times 2006 earnings) and exceptional cash-flow-generating capabilities in the near term. This includes the potential use of a $17 billion share-repurchase program, a possible dividend hike to support the stock price and new product acquisitions.

However, I believe many investors had already reduced their near-term expectations for the torcetrapib/Lipitor combination after the company’s third-quarter earnings call, as management hinted at a relatively lengthy regulatory review and safety-evaluation process. Nonetheless, there’s plenty of room for more disappointment.
Although the company has an expansive pipeline of more than 240 projects in development, the shortage of late-stage opportunities and the timing of new product flow won’t compensate for this setback. The company has a very poor track record on the R&D front recently, which definitely calls into question its ability to move ahead effectively without more external product licensing or acquisition activity.

More importantly, the company must now be more aggressive in the pursuit of immediate new product opportunities. This may take the form of larger company or product acquisitions, as Pfizer was already relying on external licensing activity for about a third of future top-line growth.

Look to Abbott on the Competitive Front
The safety issues attached to this pipeline setback are initially likely to widen new-project risk premiums across the industry. Questions will probably linger over competing projects designed to create an HDL-raising cholesterol treatment from both Roche and Merck (MRK – commentary – Cramer’s Take – Rating), which are in late-stage development. In addition, Pfizer’s two earlier-stage projects may now also face longer safety evaluations and development timelines.

The main beneficiary in this situation appears to be Abbott Labs (ABT – commentary – Cramer’s Take), which recently acquired Kos Pharmaceuticals (KOSP – commentary – Cramer’s Take) and its HDL-raising Niaspan product line.

The Niaspan product is already on the market and is in a different therapeutic class than torcetrapib. It does have its own side-effect issues, but the next-generation Niaspan Low Flush version is expected to reach the market by the middle of next year. In addition, Kos is expected to bring a Niaspan/generic Zocor combination cholesterol product to market by 2008.

I expect that Abbott will now be able to maintain the benefits from this HDL franchise a bit longer than anticipated, as well as leverage its product combination opportunities. A potential Crestor/Niaspan combination project has also previously been rumored, which would couple the most potent LDL-lowering statin on the market with Abbott/Kos’ HDL-raising treatment. This is likely to provide superior efficacy to the company’s own Niaspan/generic Zocor combo, as well as any other competing combination LDL/HDL treatments currently in development.

The outlook for Niaspan definitely seems to have improved as a safe and proven HDL combination treatment option.