Commentary: Pfizer Has Plenty Of Pain To Kill
Pfizer Inc.'s (PFE ) management has long been known for taking calculated risks. And its handling of the painkiller Celebrex has been no different. While analysts believe the drug is essentially dead after a study linked it to increased risk of heart attack, Pfizer is hanging tough. Chairman and Chief Executive Henry A. McKin- nell says there's conflicting data on whether Celebrex really poses a risk and insists he has no plans to withdraw it. A risky stance, indeed: If another study confirms Celebrex is linked to heart attacks, trial lawyers may have ammunition to argue that Pfizer continued to peddle a dangerous product.
Pfizer's brand of iron will has served the company well over the years. But even if its aggressive defense of Celebrex pays off, Pfizer may be on the wrong side of an even bigger gamble. McKinnell & Co. continue to bet that the $51 billion drug giant's long-term growth prospects are robust. But the challenges facing Pfizer are numerous, most notably weak in-house research and looming threats from generics. As they confront a less prosperous future, management may have to rethink its strategy.
Indeed, more and more investors and analysts argue that while the drug company should continue to plow money into new-drug development, the company needs to aggressively reduce marketing and other costs and return greater amounts of cash to shareholders through a higher dividend. "They [Pfizer executives] are growth-minded managers in charge of a mature company," argues Sanford C. Bernstein & Co. analyst Richard T. Evans.
The market seems to agree. Four years ago, the high-flying stock sported a price-earnings ratio of about 34. Now, Pfizer's valuation has sunk to just 12 times expected 2005 earnings, well below the market multiple of 16.4.
McKinnell acknowledges that the company will see sluggish growth between 2005 and 2007 as products now generating $14 billion in sales face possible generic competition. He says, however, that in the five-year period ending in 2006 the company will have filed for approval on 20 new products -- drugs that will help Pfizer generate healthy growth after 2007.
That scenario, however, may be overly optimistic. For one thing, even if Celebrex and the painkiller Bextra remain on the market, sales -- which currently stand at a combined $4 billion a year -- are likely to decline substantially amid concerns about side effects.
At the same time, Pfizer could lose its hold on a crucial market. Indian generic maker Ranbaxy Laboratories Ltd. is fighting Pfizer in a Delaware court for the right to launch a generic version of Lipitor, a cholesterol-lowering drug with $10 billion in annual sales. Two Lipitor patents are at issue, and Ranbaxy's complex arguments include assertions that the Indian company doesn't infringe the first patent and that the second is invalid. McKinnell says it will be tough for Ranbaxy to win on both patent challenges and that he's confident Pfizer will prevail. But he acknowledges that a loss would be "catastrophic." Smith Barney (C ) analyst George Grofik warns, moreover, that Wall Street is underestimating the strength of Ranbaxy's case and that it is far from certain Pfizer will win. If Ranbaxy comes out on top, a generic Lipitor could hit the market in a couple of years, well ahead of the 2011 time frame that the market is anticipating.
There are also questions about the most important drug in Pfizer's pipeline. It is a treatment that raises HDL, or so-called good cholesterol, that Pfizer is combining in one pill with Lipitor. Problem is, it may take years before trials show whether raising HDL actually reduces heart attack deaths. If that data isn't available when the drug launches as expected in 2008, insurance providers may initially resist covering the product.
And even if the combo is a monumental success, it is likely to simply replace Lipitor sales that will eventually be lost to generics. Another reason investors question McKinnell's insistence that Pfizer has plenty of growth ahead.
By Amy Barrett with Susan Zegel in New York