Pfizer's $3 Billion Mistake
Rob Fannon, editor, The Medical Investor
When a world-class marketing machine like Pfizer can't sell a drug, that's when you know Big Pharma is in a world of hurt…
Last year, Pfizer spent $7.5 billion in research and development, a huge number for sure. Yet, it spent twice as much on marketing! That's right, more than $15 billion on a legion of blond bombshells to push its top-sellers like Lipitor and Viagra...
I've written extensively on Big Pharma's plight when it comes to generic drugs. Quite simply, drugmakers are scrambling to replace the more than 30% of revenues that will come under attack from generic copycats in the next two to three years.
Last December, Pfizer suffered a huge blow when it was forced to pull its top heart drug candidate due to "an imbalance of mortality and cardiovascular events" – meaning it actually induced deaths from heart attacks in clinical trials.
To add to its misery, the company announced two weeks ago that it was pulling yet another blockbuster-to-be off the market. But this time, it wasn't because of safety problems. The problem was the company couldn't sell the darn drug, even with its multibillion-dollar marketing budget.
The drug, called Exubera, was the first inhaled version of insulin on the market. The FDA approved it to treat diabetes back in October 2006. Yet, the company only managed to sell $12 million worth of the stuff so far this year. On the In the Pipeline daily blog, Derek Lowe, a drug discovery scientist, calls the sales "horrifyingly tiny... which can be rounded off to zero."
Pfizer finally threw in the towel and pulled Exubera off the market, at a cost of $3 billion charged against earnings.
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To anyone who knows anything about the drug industry, Pfizer is in big trouble. The company's forecasts for both the side effect-prone heart drug and underperforming Exubera were well north of $2 billion per year. Pfizer hoped to stuff these new drugs in its sales bags in order to replace the $10+ billion it will lose in revenues when its patent on the world's top-selling drug, Lipitor, expires in 2011.
With these two drugs now in the medical graveyard, there's absolutely no way the company will be able to replace these expiring sales.
At a $170 billion market cap, I wouldn't consider touching Pfizer stock until it shed at least 40%-50% of its value, something I think will happen in three to four years' time. When it does, a lot of folks are going to be unhappy when they open their retirement-fund statements. Pfizer is one of the most widely held stocks on the market. Fund managers just park money there, thinking the company will always be able to push its drugs to doctors and patients, a theory that was never disproved until the Exubera debacle.
I think Dr. Lowe nailed the company's near-term future prospects:
"Pfizer's situation remind[s] me of a slow-motion film of a train running toward a cliff... a colleague of mine said 'Yeah, me too, but in this case they're still boarding passengers and loading their luggage'."
My advice is to clean Pfizer out of your retirement portfolio and save yourself the sticker shock in a few years…
Good investing,
Rob Fannon
Editor, The Medical Investor
P.S. I cruise over to Dr. Lowe's blog, In the Pipeline, once a week. Derek is an organist chemist working in drug discovery. His insider perspective always makes for interesting and valuable reading. Check it out for yourself here.
P.P.S. Granted, most Big Pharma companies have problems right now, but there's one giant drug maker that's poised to benefit from nearly every problem facing its weaker competition. It's one of my top recommendations right now, and I recommend holding it for decades. For more on this drug giant and my favorite health care retirement plan, click here.
