The FDA recently granted approval for Pfizer’s (NYSE:PFE) Duavee, which has been developed by its wholly-owned subsidiary Wyeth in collaboration with Ligand Pharmaceuticals Inc.  The drug introduces a novel approach to treating hot flashes in menopausal women, and is also approved for the treatment of postmenopausal osteoporosis (common bone disease due to low estrogen levels). Unlike other drugs in the market, Duavee pairs conjugated estrogen (CE) with an estrogen agonist/antagonist (also known as a selective estrogen receptor modulator). The drug has the advantage of protecting uterus lining against hyperplasia, which increases risk of cancer of uterine lining and can happen with estrogen-only treatments. 
Given the reduction in cancer risk, we expect the drug to gain traction. There are approximately 33 million women in the U.S. between the ages of 45-59 (menopausal), and most of them experience hot flashes.  The quality of life can get significantly affected if this common condition is left untreated. Pfizer’s existing drug Premarin, which primarily consists of conjugated estrogen, earned over $1 billion in revenues in 2012. We expect Duavee to cannibalize some of Premarin’s sales starting from the first quarter of 2014. Furthermore, given that Pfizer is a well diversified company with several other major drugs, Duavee’s success will lead to only a small incremental value add.
Revenues from Duavee will be accounted under Premaring & Other Immunomodulatory Drugs division, which is the least significant business segment for the company. However, this is just the start. Pfizer will have a much bigger opportunity once its drug is approved in other geographies, especially Europe and Asia.
Pfizer is a research focused company and needs to consistently invest in R&D to keep its edge in the market, especially in the light of recent patent expiries. There may be near term R&D cuts as the company restructures its business to divert resources to certain key growth areas such as oncology (cancer treatment), and reduces spending in other therapeutic areas. During its second quarter earnings release, Pfizer announced its decision to reorganize its business into innovative and value segments which would lead to better focus and efficient resource allocation. Over the longer term, we believe the company will need to step up its R&D efforts to counter competition from generics and recover the sales lost due to patent expiry of key cardiovascular drugs.
Our price estimate for Pfizer stands at 33.90, implying a premium of about 15-20% to the market price.