When a drug company is facing the expiration of patent rights for a product which delivers 25% of company revenue it has to find sources to replace the loss. This was the issue facing Lipitor maker Pfizer Inc. (PFE), the world’s largest pharmaceutical company.
Lipitor, which treats high cholesterol, is the world’s largest selling drug. The drug goes off patent in November of 2011, opening the door for entry by generic drug manufacturers. The resulting loss in revenue for Pfizer posed concerns for analysts who viewed the pipeline of new drugs at Pfizer as inadequate.
The acquisition of Wyeth does not directly address those concerns. Wyeth derives the bulk of its revenues from non-prescription products such as Advil, Chapstick and Robitussin. It has also become a leader in the development of biologic-based drug production. Biologic processes utilize living cells in the manufacturing process in contrast to the use of small chemical molecules.
The difference between the two processes is that the biologic molecules are larger, more difficult to produce and more expensive to replicate. As a result, they are less vulnerable to the generics. Pfizer is gambling that the edge Wyeth has in biologics will translate into more secure long term revenue growth than is the case with molecule based drugs.
In a major announcement which has the potential to lessen the impact of the loss of exclusivity for Lipitor, Pfizer announced the suspension of phase 3 clinical trial for Sutent, a treatment for advanced pancreatic cancer. The suspension resulted from clinical trial results which were so positive that the drug should be made for clinical testing.
The positive results for Sutent have buoyed investor confidence in PFE. Analysts have been cool to the merger of Pfizer and Wyeth, driving the stock to a 52 week low on concerns that the merger did not address the issue of Lipitor going off patent and that the premium being paid for Wyeth was excessive.
Moody’s rating service, which had reduced the rating of Pfizer one level from Aa1 to Aa2 has also indicated that the rating would be subject to a further downgrade to A1 if the merger proceeds under its current terms. Moody’s is concerned that the addition of $22 billion in debt will be an excessive burden for the company.
While the progress with Sutent and the potential for the biologic drug hold promise, it remains to be seen if they can replace the loss of revenue derived from Lipitor.