Pharmacies Sue Pfizer for Stalled Generic Lipitor Production
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Thursday, July 5, 2012, a group of drugstore retailers in the United States, led by Walgreen (NYSE: WAG), The Kroger Co. (NYSE: KR), and Safeway (NYSE: SWY), filed suit against Pfizer (NYSE: PFE) in the United States District Court in Trenton, New Jersey. They allege that the drug manufacturer engaged in numerous acts of fraud and conspired with others to delay the introduction of the generic version of the anti-cholesterol drug Lipitor. The suit also names the India-based generic pharmaceutical manufacturer Ranbaxy Laboratories, Ltd. (Natl India: RBXY), as a co-defendant.
Lipitor (generic chemical name: atorvastatin) was developed in-house by Pfizer in 1985, and was first marketed by the company in 1997. Lipitor is the best-selling prescription drug of all time, generating almost $9.6 billion in gross sales for Pfizer during 2011. Pfizer's patent on the drug expired in November of last year.
The lawsuit alleges that Pfizer filed a fraudulent, baseless patent application for Lipitor with the U.S. Patent and Trademark Office (USPTO) and a sham petition with the U.S. Food and Drug Administration (FDA) to obtain the original patent on the drug. Further, the plaintiffs claim that Pfizer engaged in blatantly anti-competitive behavior by contesting without just cause FDA applications by generic manufacturers to manufacture the product.
The plaintiffs additionally claim that Pfizer entered into agreements with managers of pharmaceutical and healthcare benefit plans, which required those managers to buy Lipitor over any new generic version of the drug and at higher prices than buyers would have paid otherwise.
It is also alleged that Pfizer entered into a 2008 contract with Ranbaxy Laboratories whereby Ranbaxy agreed not to begin production of generic Lipitor until November 2011. The plaintiffs claim that Lipitor should have entered generic-available status in March 2010. A number of consumer-related groups have filed suit against Pfizer in the past few months in various state and federal courts in the U.S., claiming that they paid artificially high prices for Lipitor due to alleged actions by the company, which artificially raised prices and/or stalled the introduction date for generic Lipitor.
Pfizer maintains that it has not engaged in any illegal activity. The company states that it did not file any fraudulent claims with the USPTO or the FDA, and it did not engage in any pattern of behavior to intimidate manufacturers of generics from entering or delaying entry into the cholesterol drug market.
It is estimated that Lipitor held a 38% share of the anticholesterol drug market in the United States, but that share has drastically fallen during the past six months. It is now estimated that it controls only 15% of that same market as of June 15. The plaintiffs in the lawsuit claim that Lipitor would have lost an even greater part of its market share had it not allegedly engaged in the illegal activities, as brand name, non-generic drugs usually lose 90% or more of their market share within three months of the introduction of the generic version. Ranbaxy Laboratories is estimated to now control over 50% of the U.S. market for anti-cholesterol drugs, primarily making generic versions of such drugs.
Joining Walgreen, Kroger, and Safeway as plaintiffs in the suit are grocery/pharmacy chains SuperValu (NYSE: SVU) and H-E-B Grocery Company, LP (privately held).
Walgreen is the largest consumer drug retailer in the United States with over 8,000 locations. Walgreen's sales in June 2012 fell by 10.0% over the previous month due in large part, the company acknowledges, to a number of pharmaceuticals, such as Lipitor, that have migrated from brand-name-only to generic status. The company, therefore, felt compelled to take some sort of action against Pfizer to preserve revenue.
Walgreen has had a stellar track record in paying dividends to its stockholders, with an average annual increase of its dividend payment of 18.6% for the past 36 consecutive years. Just three weeks ago, Walgreen announced that its dividend payable on Sept. 12, 2012 will represent an increase of 22.5% over the dividend paid in 2011 for 37 consecutive years of dividend growth.
Kroger and Safeway are, respectively, the second and third largest grocery store chains in the United States, trailing only Wal-Mart. However, both chains are quickly and continually expanding their non-grocery services and inventory at virtually all locations in order to reclaim market share lost to Wal-Mart's "one-stop" retail philosophy. Accordingly, both Kroger and Safeway have become major players in the retail pharmaceutical industry.
SuperValu, which operates grocery stores under the Albertsons and Save-A-Lot brands, is hoping to reverse its recent fortunes by also expanding retail drug operations at its stores. In the past year, SuperValu's stock had been removed from the S&P 500 due to poor performance (now back), and the company is looking at retail drug sales to help it deal with over $1 billion in debt that is due to mature in 2016 and which seems to be spooking both analysts and investors.
Although the resolution of this lawsuit may take years – if a settlement agreement is not reached sooner – I believe that its mere filing indicates that trouble lies ahead for Pfizer's expected earnings, even if they are found not to have engaged in any illegal activity. Lipitor is the biggest grossing drug of all time, yet it has lost well over half of its market share in the past six months. All the while Pfizer has allegedly been engaging in activities that, if not found illegal, are certainly very aggressive in order to preserve that falling market share. These things do not bode well in the short term for Pfizer when we are talking about their leading product – a product that was responsible for income approaching $10 billion last year. So the question becomes: Will they be able to make up for this loss in their new drug pipeline?
Amazingly, the answer could be "yes.” Most industry analysts believe that Pfizer expects to have some very promising new treatments for Alzheimer's disease and Diabetes mellitus type 2 that could more than offset a revenue drop due to some of their drugs' migration to the generic market. This, coupled with Pfizer's aggressive expansion into the emerging pharmaceutical markets in China and Russia, could turn 2013 into a banner year for the company – and a market in which Pfizer does not rely so heavily on its one blockbuster product.
Therefore, in the short-term – i.e., the balance of 2012 – Pfizer may have some Lipitor-induced worries to deal with. But 2013 could see the company enter a whole new profitable era, just one not so heavily based on Lipitor.
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