Eliquis Cannot Alter Patent and Demographic Losses for Pfizer

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Following the loss of patent protection on Lipitor in November last year, Pfizer (NYSE: PFE) has decided to slash its primary-care drugs sales staff by 20% (600 jobs out of 3,000). Lipitor was the crown jewel of Pfizer’s drug portfolio for years, contributing as much as $10 billion to annual revenues. But following the expiration of its patent, several cheaper alternatives are now available in the market that are eating away Pfizer’s market share. The cost cutting, which was reported by Bloomberg although not officially announced by Pfizer, comes then as no surprise. The layoffs are expected to start any time now.  

The primary care drug unit forms the core operation of Pfizer and includes popular names such as Viagra (erectile dysfunction), Lyrica (fibromyalgia and diabetic nerve pain) and Celebrex (arthritis).

Through the end of last year, Pfizer had 103,700 workers but it may hire more next year if it gets the green light from authorities to start selling the blood thinner Eliquis which it developed by collaborating with Bristol Myers Squibb (NYSE: BMY). BMY has struggling this year with the loss of patent of its blood thinner drug Plavix, through which it earned $7.1 billion in 2011, and the massive $1.8 billion R&D loss that it had to incur on the failure of its Hepatitis C drug BMS-986094 whose operations were halted after a patient died during drug trials. Plavix formed a third of BMY’s revenues in 2011. Its next best-selling drug, Abilify, nets just $2.8 billion (2011). Several local and foreign companies operating in the U.S. have already been awarded generic licenses for Plavix. The full impact from the loss of patent will manifest itself in the coming quarters.

However, both companies had something to cheer about this November when Eliquis received a go ahead from the European agencies. The new drug will be competing with other oral anticoagulants such as Bayer AG and Johnson & Johnson’s (NYSE: JNJ) Xarelto and Boehringer Ingelheim's Pradaxa. But according to Pharma Intellect, Eliquis is a superior new generation anticoagulant and looks to gain market share because of this.

Stroke prevention in atrial fibrillation is an enormous market and affects more than 2 million people in the U.S alone. The older European market is about twice as big. This sector is moving away from conventional warfarin and aspirin to the new generation drugs.  According to one estimate, this market could grow to $10 billion per year when the new generation drugs capture 50% of the total global market share from traditional drugs.  

At its peak, Eliquis has the potential to generate $5 billion in sales annually which will be shared equally between Pfizer and BMY. This will translate into about $1.9 billion in net profits of each of the two firms. Since BMY is much smaller than Pfizer, therefore the impact of Eliquis on its earnings per share will be much greater – Eliquis will add $1.1 to BMY’s EPS and $0.25 to Pfizer’s EPS. The EU’s approval has raised hopes about a nod from the U.S. FDA. Analysts are expecting this to happen by the end of Q1-2013.   

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Pfizer</strong></p> </td> <td> <p><strong>BMY</strong></p> </td> <td> <p><strong>JNJ</strong></p> </td> </tr> <tr> <td> <p><strong>Stock YTD</strong></p> </td> <td> <p><strong>17.51%</strong></p> </td> <td> <p><strong>-7.58%</strong></p> </td> <td> <p><strong>7.87%</strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$187.23B</p> </td> <td> <p>$53.76B</p> </td> <td> <p>$196.07B</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>19.91</p> </td> <td> <p>29.26</p> </td> <td> <p>23.17</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>1.28</p> </td> <td> <p>1.11</p> </td> <td> <p>3.05</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>3.80%</p> </td> <td> <p>4.30%</p> </td> <td> <p>3.50%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>6.42%</p> </td> <td> <p>9.93%</p> </td> <td> <p>9.19%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>11.34%</p> </td> <td> <p>18.51%</p> </td> <td> <p>13.03%</p> </td> </tr> </tbody> </table>

In the previous couple of years, every single pharmaceutical giant has lost patents for one or more of their successful drugs. Pfizer however has better growth prospects than most of its rivals. In the first nine months of the current year, Pfizer’s total revenues have dropped by 11% to $43.9 billion. Overall, it is expecting sales to drop to 13.4% this year and by 1.2% in 2013. Total EPS for 2012 is projected to be $2.16 per share which is expected to improve to $2.29 next year, a 5% improvement.

At the moment, Pfizer neither sells a drug, nor has any in its pipeline that could go on to replace the loss of earnings from Lipitor. The growth of the business is going to come from acquisitions and a re-focus on its core pharma operations, which is evident through the spinoff of its animal health operations; creating Zoetis and the disposal of its baby food division, Pfizer Nutrition, to Nestle for $11.85 billion.

In the short-term, with the aging baby-boomers in the U.S. reaching Social Security and Medicare age, drug companies like Pfizer are looking for a continuation of the patented drug revenue associated with helping older people cope. The problem is that the U.S., and many E.U. members, is that many in this generation are essentially broke relative to their retirement needs. The current model of passing the costs of the retirement system through ever-escalating housing prices onto the younger generation is pretty much over in the U.S. and Europe.

These governments now face funding these unfunded liabilities by either defaulting on their obligations, printing the money – which is the current solution and amounts to a wealth transfer from future generations to health care companies like Pfizer – or allowing the system to collapse, which is not what I expect.  Some mixture of the first two options is what is likely on tap, because the baby boomers are woefully under-invested in their own ‘retirement.’  They will be faced with a number of choices when looking at the numbers but all of them include a lower standard of living which also means a lot less money on patented prescription drugs.

PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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