Healthy Skepticism Library item: 7122

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Publication type: news

Steyer R.
Pfizer Gropes for Answers
The Street.com 2006 Dec 4
http://www.thestreet.com/_yahoo/newsanalysis/pharmaceuticals/10325829.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

Abstract:

Right after Pfizer (PFE – commentary – Cramer’s Take – Rating) ended the development of what was its most important experimental drug, Chief Executive Jeffrey Kindler said he would accelerate his plans for transforming the company.
On Wall Street, inquiring minds weren’t quite sure what that would mean. Will Pfizer fire more people? Will it buy more products, or maybe acquire more companies?

Kindler has promised that he will reveal details of his vision in January. Based on his recent announcement that 20% of the 11,000-member U.S. sales force will be fired by year-end, it’s apparent that more payroll reductions and cost-cutting are probably going to be part of Pfizer’s strategy.

However, Kindler must add sources of sales and profit, and he has several options, even if what’s ultimately chosen isn’t immediately known.

What is certain is that Pfizer has decided to stop work on torcetrapib, a drug designed to raise levels of so-called good cholesterol in order to improve cardiac health. Pfizer cancelled the project on Saturday after an early look at a clinical trial showed a higher death rate for patients taking a combination pill of torcetrapib and Lipitor than those on Lipitor alone.

Lacking specific guidance, analysts let their imaginations wander, with speculation ranging from massive firings to Pfizer acquiring a big biotech company or even one of its Big Pharma brethren.

Megamergers, a staple of Pfizer’s past, isn’t exactly what Kindler had in mind when he told analysts recently that he would look at “strategic” acquisitions. Company executives talked about modest-sized deals in which Pfizer would be a buyer, licensee or collaborator on products or technologies, if not an acquirer of other health care firms.

Catherine Arnold, an analyst with Credit Suisse, didn’t recommend a target, but she did write in a research report that “sizeable acquisitions should be more seriously considered by Pfizer after this news.” Arnold, who is neutral on the stock, expects Pfizer to raise its dividend “to keep value investors interested.”
The torcetrapib failure won’t hurt the company’s results for 2007 and 2008 because Pfizer hadn’t included the drug in its guidance. Before the research program ended, analysts had offered a best-case scenario in which the combination pill of torcetrapib and Lipitor might have reached the market in late 2008 or early 2009.

Like many others on Wall Street, Arnold worries about the end of this decade and beyond. For 2010, she cut her earnings-per-share forecast to $1.94 from $2.05. Earnings per share could fall as low as $1.70 if Pfizer suffers a setback in its U.S. patent fights over Lipitor, which now accounts for one-fourth of corporate revenue.

Pfizer has won court battles for the key Lipitor patent that expires in March 2010, but it suffered an adverse decision on another patent due to run out in June 2011. Pfizer is appealing.

“We think it’s likely that our EPS projections will rise in January” after the company meets with analysts, “since Pfizer had indicated that incremental cost-savings are planned,” says Arnold, who doesn’t own shares. Her firm has an investment banking relationship with the company.

David Risinger of Merrill Lynch isn’t sure Pfizer will ever be able to replace Lipitor, the top-selling drug on the planet. In 2005, Lipitor produced $12.2 billion in revenue, and this year, Pfizer is forecasting $13 billion.
Risinger, who doesn’t own shares, cut his rating to neutral from buy. He wrote in a research report that he doesn’t see existing drugs, including some newer ones that Pfizer had been touting, or experimental medications offsetting the sales that will vanish when Lipitor loses U.S. patent protection.

By 2012, he predicts the company will have earnings of $1.87 a share. This year, earnings are expected to be $2.05.

During the next few years, Pfizer’s results also will be hit by patent expirations on several big products besides Lipitor. A research report by UBS Securities says Pfizer’s sales based on current drugs could drop from an estimated $47 billion in 2006 to $32 billion in 2012. Assuming every experimental drug reaches the market — “highly unlikely” says the report — Pfizer would add only $14 billion in revenue by 2012.

UBS analyst Roopesh Patel is keeping his neutral rating on Pfizer, telling clients that he was lowering his EPS estimates for 2009 and 2010 and is “much more nervous” about 2011 and 2012. Patel doesn’t own shares, but his firm has an investment banking relationship with the company.

At JP Morgan, analyst Chris Shibutani cut his rating to neutral from overweight, fearing that Pfizer’s management could become distracted from its plan to cut costs and boost sales.
“While we believe management has the capacity to strategize a clear-eyed offensive, sure-footed execution will be the key,” he wrote in a research report. He doesn’t own shares. His firm has an investment banking relationship.

Shibutani wonders if the “apparent consequences” of the torcetrapib decision “will prove sufficiently disruptive to ongoing operations overall to put near-term performances of the core businesses at risk.” Those consequences include “more rapid and extensive restructuring [and] more aggressive and potentially more urgently conducted business development activities,” he says.