Pfizer’s Pipeline Story Begins to Unravel

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Stock in Pfizer (PFE) has climbed more than 18% in the last year on investor confidence that new product launches will offset slowing sales from branded blockbusters that have lost market exclusivity or are at-risk of losing share due to upcoming patent lapses. This spirited bullishness is premature, however, as recent physician surveys and regulatory setbacks suggest switching patients from competitive products to the drug maker’s new offerings could prove a tougher sale than initially thought.

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Between 2010 and 2012, Pfizer stumbled off the patent precipice, as branded drugs that made up 42% of annual pharmaceutical sales, including the $11 billion lipid-lowering drug Lipitor (atorvastatin), the antacid Protonix (pantoprazole), and its glaucoma drug Xalantan (latanoprost ophthalmic solution) lost patent protection.

Walking on the ledge out to 2015, the patent cliff looks just as daunting, as more than 17.5% in sales derived from the company’s existing branded portfolio is at-risk of losing market exclusivity, including two of its top-selling prescription drugs: Enbrel (etanercept) copies are already on the market in Asia and India, and the Novartis AG (NVS) subsidiary Sandoz is readying its own intrusion on Pfizer’s $3.7 billion auto-immune franchise with a biosimilar version for rheumatoid arthritis and psoriasis; and, the original basic patent for the anti-inflammatory Celebrex (celecoxib) expires on May 30, 2014, which means cheaper copies to Pfizer’s $2.7 billion pain drug could be on U.S. pharmacy shelves no later than January 2015.

Pfizer had high hopes for its JAK inhibitor tofacitinib, branded Xeljanz, which gained FDA approval in late November 2012, for adults with moderate to severely active rheumatoid arthritis (RA). This first-in-class oral JAK inhibitor works by blocking Janus kinase (JAK), signaling pathways involved in the body’s immune response. Xeljanz fights RA from inside the cell, attacking a different part of the pathway than biologic agents like the tumor necrosis factors (TNF), which block pro-inflammatory cytokines (proteins) from outside the cell.

Analysts had originally forecasted peak sales of more than $3 billion, due mainly to dosing advantages over the popular TNF inhibitors, like Amgen’s (AMGN) Enbrel (etanercept), and Johnson & Johnson’s (JNJ) Remicade (infliximab). Xeljanz offers a convenient, twice daily dosing schedule versus subcutaneous injection and intravenous administration, respectively. (Amgen, by the way, sells Enbrel in the U.S. and won an extended patent on the drug. Pfizer, as mentioned above, sells Enbrel outside the U.S. and outside Japan, but a looming 2015 patent expiration in Europe limits the sales prospects. Also, generic versions of Enbrel are already on the market in China and India.)

Though the first new disease-modifying drug for RA patients indifferent to methotrexate treatment in more than a decade, the small molecule drug’s blockbuster trajectory has hit a few unwanted speed bumps: In April 2011, four patients in clinical trials unexpectedly died while taking the pills, leading to lingering concerns by specialists over its safety (albeit only one case was linked to the drug itself); European regulators have rejected the drug, too, opining that the data has failed to show enough reduction in structural damage to joints from RA to warrant approval (guided by a risk/benefit analysis).

Analysts argue that Xeljanz can still stand and deliver $1.6 billion in sales by 2016 (assuming expanded labeling). However, anemic second-quarter results of $22 million speak to a different outcome – a narrative where rheumatologists, after prescribing Xeljanz to one or two patients, are cautiously awaiting results (and scrutinizing the med's uncertain safety profile) before recruiting additional RA patients, according to Evolution Marketing Research's John Taenzler.

In addition, the manufacturers of TNF inhibitors have spent years building relationships with managed care providers to keep their RA biologics on formularies, notes Quintiles’ analyst Troy Hampden. Ergo, Pfizer is facing managed care pushbacks too.

In May 2012, U.S. regulators approved Elelyso (taliglucerase alfa) for long-term enzyme replacement therapy to treat a form of Gaucher disease, a rare genetic disorder that occurs in people who do not produce enough of an enzyme called glucocerebrosidase. The enzyme deficiency causes fatty materials (lipids) to primarily accumulate in the spleen, liver, and kidneys, leading to organ damage, pernicious anemia and bone problems.

Once forecasted to contribute $900 million to top-line growth, the drug is likely to deliver no more than $200 million in peak annual sales after European regulators rejected the drug on the grounds that Elelyso violated the orphan-drug status of Shire’s (SHPG) Gaucher treatment, called Vpriv (velaglucerase Alfa). Vpriv, which was authorized in August 2010 for the same condition, is allowed 10 years of exclusivity under orphan-drug status.

In 2012, U.S. and European regulators approved Inlyta (axitinib) as a second-line treatment for advanced renal cell carcinoma. Similar to Pfizer’s $1.2 billion Sutent (sunitinib), the drug plays a role in inhibiting tumor vascularization through signal transduction blockade, ultimately leading to tumor shrinkage. Though Inlyta has received generally positive reviews – in terms of clinical efficacy and its comparable side-effect profile – the small molecule will struggle for voice and market share, competing in a crowded field that includes well-regarded angiogenesis inhibitors like Bayer AG’s (BAYRY) Nexavar, GlaxoSmithKline's (GSK) Votrient, Roche’s (RHHBY) Avastin and Novartis’ Afinitor. Ergo, without expanded labeling, annual sales will likely peak around $600 million.

A small sub-set of non-small cell lung cancer patients carry a chromosomal mutation, anaplastic lymphoma kinase (ALK), which is an enzyme that stimulates the growth of cancer cells. Pfizer researchers discovered that its protein kinase inhibitor Xalkori (crizotinib) achieved high response rates by blocking this ALK enzyme. Launched in late 2011, the drug generated $120 million in worldwide sales in first-half 2013.

Unfortunately, on August 16, the British healthcare guidance body, called NICE, recommended against insurance reimbursement for Xalkori. “Although the independent committee that considered the evidence found crizotinib to be clinically effective treatment for ALK-positive non-small-cell lung cancer, even when the manufacturer's discount had been applied, crizotinib could not be considered a cost-effective use of NHS resources “ said Sir Andrew Dillon, NICE Chief Executive.

Assuming treatment until disease progression, NICE estimated the cost of treatment would be between $58,245 and $72,800; assuming treatment after disease progression, the cost of a course of treatment would be approximately $80,000.

EU sales in first-half 2013 totaled just $23 million.

Despite the regulatory setback, Xalkori could still generate peak sales of more than $1.5 billion, assuming potential patient populations with a similar gene alteration in other cancer types can be identified.

Pfizer has high hopes for its Factor Xa inhibitor Eliquis (apixaban), approved by U.S. and European regulators for stroke prevention in patients with atrial fibrillation (AF) in December 2012. The efficacy of Eliquis remains undisputed among cardiologists and hematologists: In one trial, AF patients who took the drug twice a day were 21% less likely to suffer strokes than patients who took the blood thinner warfarin, which has been the gold standard of treatment for decades.

Initial physician uptake has been slower than expected, however, which analysts attribute to Eliquis being third to market – after Boehringer’s direct thrombin inhibitor Pradaxa (dabigatran) in 2010 and Bayer’s Factor Xa inhibitor Xarelto (rivaroxaban) in 2011. Additionally, Eliquis has the narrowest labeling among the new anticoagulants.

Nonetheless, given market demographics and a favorable side effect profile (significantly less bleeding compared to warfarin), should the drug receive the all-important indication for deep vein thrombosis, peak annual sales could easily exceed $4.0 billion.

So much for market research -- some investment research is in order, as well. Though Pfizer is facing an onslaught of competitive and regulatory hurdles, cash and equivalents totaling $33.7 billion, long-term investments of $16.1 billion, combined with an untapped credit line of some $8.3 billion, should help management weather these stormy headwinds while rebuilding a profitable drug portfolio.

In addition, more than 65% of the $31.5 billion in long-term debt does not mature until 2017 and beyond.

PFE Dividend Yield (TTM) Chart

PFE Dividend Yield (TTM) data by YCharts

Given the more than sufficient working capital of $37.9 billion, stockholders can comfortably collect an attractive cash dividend yield of 3.4% while they wait patiently on an eventual turnaround in the drug manufacturer’s fortunes.

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

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