business

Pfizer's Show of Strength

Even after a day of aggressive reassurance at the outfit's research center, analysts wonder what will follow a rash of patent expirations

By Amy Tsao

At a research and development meeting for analysts on Nov. 30, Pfizer (PFE ) stayed on message all day long. Despite questions about possible safety issues with arthritis pain medication Celebrex, patent challenges to several drugs, and controversy over advertising practices for impotence treatment Viagra, Hank McKinnell, chairman and CEO of the world's largest drug company remained upbeat: "We have every intention of managing through these challenges successfully -- and emerging even stronger."

Downplaying its reputation as a marketing powerhouse, Pfizer executives and scientists spent much of the annual session highlighting research activities and capabilities. Held for the first time in recent history at the outfit's R&D headquarters in Groton, Conn., rather than at corporate headquarters in New York City, Pfizer used the meeting to insist that its drug pipeline and cadre of recently launched potential blockbusters will help offset nearly $14 billion in revenues affected by patent expirations from 2005 to 2007.

BODY AND MIND.

  Plenty of competitors -- including Merck (MRK ), Bristol-Myers Squibb (BMY ), and Schering-Plough (SGP ) -- aren't as well prepared for patent expirations, McKinnell contends, and are "gone or are in decline." By contrast, Pfizer has the stuff to prove its resilience, he said.

Among the pharma's strengths: a global network of R&D labs, nearly a dozen drugs with annual revenues of at least $1 billion, and deep pockets to partner with or acquire promising biotechs.

Much of the meeting's focus was on drugs recently filed for approval with the Food & Drug Administration. These include antibiotic Zithromax in a once-daily dose; a follow-up to top-selling nerve-pain drug Neurontin, called Lyrica; an eye-disease medication dubbed Macugen; and sleep drug Indiplon. Earlier-stage drugs highlighted included offerings that could enhance the treatment of ailments including schizophrenia and asthma.

WAITING FOR 2008.

  Pfizer may be on offense, but its ability to tap new products and generate a period of strong growth remains to be seen, analysts say. Richard Evans, analyst at Bernstein Research, points out that despite McKinnell's optimism, the effects of upcoming patent expirations of antibiotic Zithromax, antidepression drug Zoloft, hypertension drug Norvasc, and allergy medication Zyrtec will be difficult to mitigate. "Patent [expirations] remain dominant, relative to new product flow," he says.

Pfizer also is confronting a "hostile public opinion and policy environment," says Karen Katen, the outfit's president of global pharmaceuticals. She says the rate of uptake on new products has been slower than historical levels. "Drugs we've recently launched have not been significant contributors" to growth yet, she said.

For example, sales of Caduet, the combination pill of hypertension drug Norvasc and cholesterol-lowering blockbuster Lipitor that was approved earlier this year, have been unimpressive. Says Katen: "Changing physicians' habits is going to take time."

Pfizer's stock has certainly seen better days. At around $27, it's near a 52-week low. McKinnell asked investors to focus on the potential for earnings growth. Yet even he acknowledged "a period of slower growth" over the next three or four years, and that coming patent losses are "very visible and very certain." He called 2008 a "crossover" year when Pfizer will finally be free of damaging patent expirations.

EARNINGS AND GUESSWORK.

  Some observers are willing to give Pfizer the benefit of the doubt. John Schaetzl, research vice-president at GE Asset Management and a long-time investor, says he was impressed with the breadth of early-stage drug candidates and platform technologies. Beyond that, he found the positive attitude of Pfizer's scientists at the Groton meeting encouraging.

Others are less sanguine. "They have a very full pipeline," said one asset manager. "But they should because they're the biggest." He's hopeful that Pfizer's nearly $2 billion investment to develop drugs that raise so-called "good cholesterol" will pay off in the "multibillion dollar" range. Still, it's difficult to say what earnings will be, the asset manager said. "Assigning a valuation to the stock doesn't have a lot of meaning."

Pfizer has a tough job convincing investors and analysts that the patent expirations can be navigated without too much damage to the bottom line. The Nov. 30 meeting was a good start, analysts say, but Pfizer clearly needs to stay focused on these issues in the months -- and years -- to come.

Tsao is a reporter for BusinessWeek Online in New York

Edited by Beth Belton

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