The Year 2014 In Review: Pfizer Streamlined R&D And Pursued Oncology Market Amid Competition From Generics

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Pfizer (NYSE:PFE) faced significant pressure on its revenues in 2014 due to the continued impact of patent expiry for key drugs and the resulting generic competition, as well as the termination of certain co-promotion agreements. Needless to say, it also invested lot of time in figuring out the way forward. Based on the events in 2014, it appears that the company intends to pursue the oncology market strongly and may go for a big acquisition to achieve that target. Pfizer also streamlined its R&D efforts and restructured its business to cut costs and improve shareholder value. Overall, the year 2014 can be viewed as a cornerstone in the sense that Pfizer’s investors have a little more clarity around how the company will propel its future growth. In this note, we will touch upon the events and trends that shaped Pfizer’s business in 2014, and will follow up with another note shortly in the future discussing what 2015 holds for the company.

Our price estimate for Pfizer stands at $35, implying a premium of about 10% to the market.

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Competitive Pressure From Generics And Termination Of Agreements Continued To Plague Pfizer’s Growth

Pfizer’s revenue growth suffered, in part, due to the termination of co-promotion agreements of certain important drugs such as Enbrel. The drug is used for the treatment of plaque psoriasis, rheumatoid arthritis and psoriatic arthritis. Pfizer and Amgen had co-marketed this product in North America (U.S. and Canada) until a year ago. Apart from this, the company also faced the impact of termination of the Spiriva collaboration in some geographies, along with the patent expiry and the resulting competition for Detrol LA in the U.S. Pfizer’s other legacy products are also facing competitive pressure which is evident from a 8% decline in the revenues from ‘global established products’ segment in the first nine months of 2014. These products still form a big portion (roughly half) of Pfizer’s pharmaceutical revenues which implies that even if the percentage decline is small, other growing and yet relatively small product categories will have to accelerate their growth in order to make up for the revenue shortfall.

Although Pfizer is still the biggest pharmaceutical firm in the U.S. by revenues, its sales have declined from $67.8 billion in 2010 to $51.6 billion in 2013 due to the loss of patent exclusivity of some major drugs. We expect the figure to further decline to $49.65 billion in 2014. Pfizer had pinned its hopes on some recent drug launches, but the market adoption has been rather slow. For example, its kidney cancer treatment drug Inlyta and lung cancer treatment drug Xalkori have seen weak sales over the last few years. The kind of pricing and negotiating power that the company enjoyed over the large decade could fade if the situation doesn’t improve soon. Except for oncology and the Prevnar/Prevnar 13 franchise, Pfizer’s revenues, in our view, are likely to fall across all sub-segments including cardiovascular, immunology, metabolism and musculoskeletal.

Pfizer Showed Clear Interest In Pursuit Of Oncology

There were multiple developments that made it clear that Pfizer wants to pursue oncology drug development. This was clear in the company’s failed attempt to acquire AstraZeneca.  Besides tax savings and cost synergies, a key motivation for Pfizer to acquire AstraZeneca was its promising cancer drug portfolio (including the drugs in the pipeline). In fact, AstraZeneca’s management is very bullish about its oncology pipeline, and is targeting a growth of 75% in its revenues by 2023. [1] In early 2014, it presented promising clinical trials data on two of its experimental drugs for the treatment of lung cancer. The peak sales for each of these drugs have been estimated to be between $3 billion and $6.5 billion. [2] Overall, the company expects to launch 10 new drugs in the next seven years.

Thwarted in its effort to acquire AZ, Pfizer is pursuing alternative cancer therapies.  In June 2014, Pfizer signed a contract with Cellectis, a French biotech company. The research collaboration between the two companies will help develop cancer drugs that leverage the body’s immune system to fight cancer cells. Under the contract terms, Pfizer will pay Cellectis an initial amount of $80 million and also finance its research and development. In addition, the biotech firm may also receive additional payments on achieving development, regulatory approval and commercialization-related milestones. The deal underscores the importance to Pfizer of immuno-oncology drug development. That said, competitors such as Merck (NASDAQ:MRK) and Bristol-Myers Squibb appear to have more promising immuno-oncology drugs under development and closer to commecialization.

In November 2014, the company struck a deal with Merck KGaA for the development of the latter’s investigational anti-PD1 drug. Under the terms of the deal, Pfizer will make an upfront payment of $850 million, with additional payment of $2 billion contingent on regulatory and commercial milestones. The transaction is certainly very significant for Merck KGaA which has found a partner with deep pockets and a quicker entry in the U.S. oncology market. From Pfizer’s perspective, this is a massive investment considering the drug’s stage. However, the potential reward could also be big as immuno-oncology market is expected to pick up over the next few years.

Pfizer Turned To Cost-Cutting To Sustain Shareholder Value

Besides the pursuit of oncology drugs, Pfizer throughout the year has focused on increasing the trying to be more efficiency of resource allocation so as to infuse more cash into Research & Development  and drive its long term growth. It restructured its business to better address different sets of customers and to streamline its R&D efforts. For instance, the ‘first innovative segment’ caters to several large disease areas in primary care as well as specialty care; each have their own challenges in terms of capital allocation and go-to-market strategies. On the other hand, ‘the second innovative segment’ is more specialized and includes smaller businesses with dedicated research facilities and specific customers. It appears that Pfizer can save some costs and realize some synergies with this restructuring. To reign in costs and protect margins amid declining sales, the company also closed its manufacturing operations in Puerto Rico and laid off employees in Ireland.

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Notes:
  1. How AstraZeneca escaped Pfizer’s clutches this time, Reuters, May 27 2014 []
  2. AstraZeneca shares fall after Pfizer walks away from deal, The Guardian, May 27 2014 []