Pfizer Plays Both Sides of the Fence With Mylan
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Among the various factors that an investor must consider when evaluating a big pharmaceutical company, the firm’s ability to derive revenue from multiple sources must be high on the list. While in most cases this means considering the company’s pipeline and the patent maturity of its current lineup of drugs, in the case of Pfizer (NYSE: PFE), it now means considering the cash flow that will be generated by the recently announced alliance with Mylan (NASDAQ: MYL). Under the agreement, the two drug makers will partner to begin selling generic drugs in Japan while using Pfizer’s name and distribution channels.
On August 22, the two companies announced that they had entered into “an exclusive long-term collaboration,” the purpose of which was to bring generic drugs to Japan. While the specific financial terms of the agreement were not released, the division of labor places the onus for sales and marketing on Pfizer and manufacturing, research and development on Mylan. This split is ideally suited to each company’s strengths and should be well received by investors. The drugs will be marketed using the Pfizer brand name (although labeling will include the names of both companies) and by leveraging Pfizer’s expansive network of sales conduits. The belief is that the company’s expertise will allow the partnership to deeply penetrate the Japanese market.
Mylan’s contribution will be in its proven expertise in both efficient manufacturing management and in its ability to formulate complex products. The news release states that the initial portfolio will consist of 350 drugs across various therapeutic areas and an additional 125 that will need development. The President and General Manager of Pfizer’s Established Products group was quoted in the release: “We are pleased with the opportunity to collaborate with Mylan to meet the ever-growing demand for high-quality generics in Japan. We believe this collaboration will enable both companies to effectively build upon each other's core capabilities to help meet the needs of more patients and customers in Japan than ever before.” He went on to explain that one of the central contributions that Pfizer is able to bring to the deal is a nearly 60-year history in Japan building trust for its brand.
The concept of a generic drug maker and a more recognizable brand contributor is not original to this arrangement. Earlier this year, Teva Pharmaceuticals (NYSE: TEVA) teamed up with Proctor & Gamble (NYSE: PG) to bring over-the-counter drugs to P&G’s extensive distribution network. These two companies generated a combined $1 billion in over-the-counter product sales last year. If this joint venture is able to develop an even larger product offering, the results could be significant.
The success of the over-the-counter partnership thus far is a great sign for shareholders in both Mylan and Pfizer because it provides some precedent for a financially rewarding collaboration of this kind. The aim of Pfizer/ Mylan is different than Teva/ P&G, but the big picture concept is similar. Overall, the deal looks to match two very complimentary companies.
The Japanese Market
Another big reason investors should consider this collaboration a strong reason to buy Pfizer at current levels is the makeup of the Japanese drug market. Japan is one of the largest drug markets in the world, has relatively low penetration by generics and has a government-run health system that is anxious to cut costs. The circumstances are nearly ideal for the partnership to make rapid progress that will yield significant results for both companies. When combined with the strength of Pfizer’s name in the country, it is hard to imagine a nicer set up than the market into which Pfizer and Mylan are walking.
The timing of this arrangement comes at a critical time for Pfizer, when one of its blockbuster drugs is about to go off-patent. The patent exclusivity of Pfizer’s Lipitor ended this year, so steps that the company can take to protect its revenue stream are critical. In addition to this strategic alliance, the company is taking aggressive steps to hold on to some of its Lipitor patients. Under the program, Pfizer is giving patients the chance to buy Lipitor at, or below, the price of generic substitutes – one of which happens to be manufactured by Mylan. With a contingent of roughly 3.5 million patients who rely on the drug, holding on to the third that have not switched to a generic alternative means significant revenue for the company, even at the heavily discounted prices.
Through the various means described above, Pfizer has shown creativity in diversifying its revenue streams. The stock has been a solid performer thus far this year, and with a dividend yield of 3.7%, it is attractive as an income play as well. In spite of the loss of Lipitor, Pfizer is a solid buy at current levels.
Mr. Ehrman has no positions in the stocks mentioned above.The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Teva Pharmaceutical Industries and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.