Summary
After its failed attempts for a merger with Allergan and AstraZeneca to bolster its drug portfolio, Pfizer has to heavily rely on its current blockbuster drugs.
Pfizer’s blockbuster drugs face growth challenges such as losing patent protection, competition from generics and biosimilars.
M&A deals are still highly critical to Pfizer, either by more small acquisitions or a mega-merger, in order to get its revenues back on a growth path.
A mega-merger such as with Bristol-Myers could help Pfizer create a robust global inflammation and immunology drug portfolio.
Shares of Pfizer (NYSE:PFE) have declined about 10% since August 1 along with the S&P 500 Healthcare sector down 6.5%. In late August, the company announced the acquisition of Medivation, Inc. (NASDAQ:MDVN) for $14 billion in cash and a month later, Pfizer made a surprise decision against splitting itself up, citing that it is best positioned to maximize future shareholder value creation in its current structure. By acquiring Medivation, Pfizer will be able to expand its oncology product portfolio with prostate cancer drug Xtandi (enzalutamide), approved by the U.S. Food and Drug Administration, or FDA, in August 2012, which could immediately impact top-line growth.

Medivation and Tokyo-based Astellas Pharma Inc. (OTCPK:ALPMF) (OTCPK:ALPMY) have been collaborating on a synthetic non-steroidal antiandrogen enzalutamide (MDV3100) drug since 2009, for which both companies equally share all U.S. developmental and commercialization costs and profits, while Astellas has responsibility for developing and commercializing MDV3100 outside the U.S. and pays Medivation tiered double-digit royalties on ex-U.S. sales. In the second quarter 2016, Medivation reported non-GAAP net income of $50 million on non-GAAP collaboration revenue of $206 million.
Another recent smaller acquisition by Pfizer, announced in late August, includes a $1.5 billion deal with AstraZeneca (NYSE:AZN) for part of its antibiotics portfolio, comprised of the approved antibiotics Merrem, Zinforo and Zavicefta, and ATM-AVI and CXL, which are in clinical development.
Pfizer may have already given up on a mega-merger deal, after failed attempts with Allergan Plc (NYSE:AGN) in April 2016, and AstraZeneca, in May 2014, dashed hopes that the company could soon put its revenues back on a growth path as its full-year reported revenues have tumbled 27% in five years, from $67.45 billion in 2011 to just $48.85 billion in 2015. With declining revenues and earnings growth, Pfizer has little choice but to return cash to shareholders through dividends, 3.62% in 2015, and share repurchases. Since 2011, Pfizer has reduced the number of outstanding common stock through buybacks by about 1.64 billion shares, or about 21%.
Now without expansion of its product portfolio through the failed Allergan merger, Pfizer will have to heavily rely on the continued strong uptake of its pneumococcal vaccine Prevnar 13, rheumatoid arthritis drug Xeljanz (tofacitinib), blood-thinning drug Eliquis (apixaban), and breast cancer drug Ibrance (palbociclib), which gained FDA approval in February 2016 for expanded use.
Pfizer is also banking on biosimilars, which could become a $20 billion-a-year business for it by 2020, according to a company statement. Since the fourth quarter 2015, Pfizer has been selling biosimilars, including Inflectra (biosimilar infliximab) in certain European markets, Nivestim (biosimilar filgrastim) in certain Asian markets, and Retacrit (biosimilar epoetinzeta) in certain international markets, generating about $207 million in total revenues.

M&A deals are highly critical to Pfizer, either by small acquisitions or a mega-merger, as revenues of its blockbuster drugs are shrinking while the biosimilar business seems to be getting off to a slow start. In its second quarter earnings press release, Pfizer gave full-year 2016 revenue guidance between $51 billion and $53 billion, compared to the average consensus estimate of $52.88 billion. Investors are expecting third quarter revenues of $13.08 billion when the company reports its earnings on November 1. Shares of Pfizer have been underperforming the S&P 500 Healthcare sector during the last five years, and could continue to underperform until investors see significant top-line growth.
Pfizer’s Blockbuster Drug Portfolio Faces Growth Challenges
Pfizer’s top-selling blockbuster drugs, meaning those with $1 billion or more in annual sales, generated revenues of $20.12 billion in 2015, accounting for 41.2% of their total reported revenues. Based on Pfizer’s revenue guidance for between $51 and $53 billion in 2016, its portfolio of blockbuster drugs could see high-single digit growth this year, compared to an 18.84% year-over-year decline in 2015, as the new breast cancer drug Ibrance is picking up steam.
Ibrance, which was approved by the FDA in February 2015 for the treatment of hormone receptor-positive (HR+) human epidermal growth factor receptor 2-negative (HER2-) advanced or metastatic breast cancer, in combination with chemotherapy drugs letrozole and fulvestrant, generated sales of almost $1 billion so far this year.
Revenues from top-selling drug Prevnar 13, a vaccine used to prevent infection caused by pneumococcal bacteria, showed robust growth in 2015, with revenues of $6.25 billion, but began to see a rapid decline this year. According to its press release, Pfizer said the company had a "smaller remaining ‘catch-up’ opportunity", compared to the prior-year quarter due to high initial uptake of the eligible population.
In fact, Pfizer already warned in February, at its fourth quarter 2015 earnings call that the steep growth in its vaccine franchise was not sustainable and projected sales to be flat this year. Without Ibrance and Prevnar, revenues from its other top-selling drugs, including Lyrica (pregabalin), Enbrel (etanercept), Lipitor (atorvastatin), Viagra (sildenafil citrate), and cancer drug Sutent (sunitinib malate), continue to decline as generic drug competitors are making inroads.
Lyrica, a drug for treatments of seizure disorders, shingles, fibromyalgia, hot flashes and pain caused by nerve damage in people with diabetes (diabetic neuropathy), generated reported sales of $4.84 billion in 2015, down 6.39% year on year. Pfizer saw Lyrica revenues from developed Europe tumbling 36% last year, as the product recently lost or is anticipated to soon lose patent protections.

The Lyrica patent covering a method for using pregabalin to treat seizure disorders expired in October 2013. Two remaining patents, one covering the active ingredient pregabalin and a second covering methods for using pregabalin to treat pain, are set to expire in December 2018. In September 2015, Pfizer lost a patent fight in the U.K. against Actavis Plc, now Allergan Plc, and Mylan NV (NASDAQ:MYL) which market generic versions of Lyrica for use in general anxiety disorders and epilepsy, while the drug is dispensed for pain.
Another Pfizer top-selling drug, Enbrel, licensed from Amgen (NASDAQ:AMGN) to sell outside the U.S. and Canada for treatments of rheumatoid arthritis, psoriatic arthritis, spondyloarthritis and plaque psoriasis, saw a big drop of over 13% year on year, to $3.33 billion last year. Enbrel’s main patents expired in October 2012, while a second patent covering the basic composition of the drug was granted exclusivity until November 2028 in the U.S. and in Europe until August 2015.

According to the Biogen (NASDAQ:BIIB) second quarter 2016 earnings report, Biogen launched Benepali (etanercept), a biosimilar referencing Enbrel, in the U.K., Germany, Denmark, Norway, Sweden, and the Netherlands, and has generated about $17 million in revenue since its launch in February. In January, Benepali, co-developed between South Korea-based Samsung Bioepis and Biogen, received approval from the European Medicines Agency for all of Enbrel’s approved indications.
Revenues from Lipitor, another so-called patent cliff drug, plummeted from over $10 billion in 2010 to just $1.86 billion last year, after Pfizer lost U.S. patent protection in November 2011. Most of Lipitor’s revenues were generated overseas, as U.S. revenue from the drug was only $161 million last year.
Pfizer’s patent protection for Viagra, which generated sales of about $1.7 billion in 2015, will expire in April 2020. Nonetheless, Viagra is facing a generic threat from Teva Pharmaceuticals Industries Ltd. (NASDAQ:TEVA) and Mylan as early as December 2017, or sooner under certain circumstances, due to a legal settlement in 2013 between Pfizer and both companies.
In March 2016, the FDA approved the first U.S. generic version of Viagra made by Teva, and thus Teva may not have to pay Pfizer a royalty for a license to produce its generic version as part of the 2013 settlement agreement. Actavis, now Allergan, launched a generic Viagra in Europe in June 2013, after the European patents expired, which continue to impact product sales in developed Europe.
Pfizer May Have Another Opportunity for a Mega-Merger
In May 2014, after Pfizer walked away from its AstraZeneca takeover attempt, John Boris, an analyst with SunTrust, told CNBC’s Meg Tirrell in a phone interview that, "The asset they (Pfizer) need to look at, if they’re interested in being No. 1 in oncology, is the potentially No.1 immuno-oncology business going forward, which is Bristol-Myers,". In fact, a takeover of Bristol-Myers Squibb Co. (NYSE:BMY) would add rheumatoid arthritis drug Orencia (abatacept), Eliquis (apixaban), and several antiviral and cancer drugs, including a programmed death-1 (PD-1) immune checkpoint inhibitor Opdivo (nivolumab), to Pfizer’s blockbuster drug portfolio.

Pfizer has been collaborating with Bristol-Myers since 2007 on the development and commercialization of Eliquis, where both companies agreed to share commercialization expenses and profits/losses equally on a global basis. By merging with Bristol-Myers, Pfizer would create a robust global inflammation and immunology drug portfolio with Xeljanz, Enbrel and Orencia. Top-selling drug Orencia posted revenue growth of 16% year on year and sales of $1.89 billion in 2015.
A proposed merger back then would only have been possible with a significant premium. Things are different now, as the BMY stock is trading near the $50 level, after reaching an all-time high of $77.12 this summer, on concerns about growth prospects of Bristol-Meyers’s flagship oncology drug Opdivo and recent rollout of a Roche (OTCQX:RHHBY) anti-PD-L1 (programmed death-ligand 1) cancer drug.
Shares of Bristol-Myers tumbled over 10% on October 10, following the company’s presentation, at the annual meeting of the European Society for Medical Oncology, of additional results from CheckMate -026, a trial investigating the use of Opdivo as a monotherapy, showing no improvement in the median progression-free survival, or PFS, in patients with advanced non-small cell lung cancer, or NSCLC, and tumors expression PD-L1 at ≥5%, who were treated with Opdivo, compared with platinum-based doublet chemotherapy. In early August, Bristol-Myers disclosed that Opdivo as a monotherapy in patients with 5% PD-L1 expression did not meet its primary endpoint of superior PFS, compared to chemotherapy.

Investors might have hoped for a better outcome from the CheckMate -026 trial after Merck & Co., Inc. (NYSE:MRK) announced on June 16 that the rival anti PD-1 drug Keytruda (pembrolizumab), met its primary endpoint in the KEYNOTE-024 trial in patients with previously untreated advanced NSCLC whose tumors expressed high levels of PD-L1, tumor proportion score of 50% or more. Merck also announced on October 9 that in the KEYNOTE-021 trial, Keytruda in combination with chemotherapy showed higher response rates, compared to chemotherapy alone as first-line treatment of metastatic NSCLC.
Bristol-Myers Squibb’s Opdivo, approved by the FDA in November 2015 for treatments of an advanced form of kidney cancer, generated sales of $840 million in the second quarter 2016. So far, the FDA has also approved Opdivo for treatment of advanced melanoma, classical Hodgkin lymphoma and metastatic NSCLC, whose disease progressed during or after platinum-based chemotherapy. According to the company’s financial statement, Opdivo’s revenue now accounts for over 50% of the company’s oncology product portfolio, compared to just under 5% a year ago.
Merck’s Keytruda was approved by the FDA for treatment of advanced melanoma in September 2014 and for metastatic NSCLC in October 2015. In the second-quarter 2016, Keytruda generated sales of $314 million, less than half of Opdivo’s revenues. On August 8, Keytruda received FDA approval for the treatment of patients with recurrent or metastatic head and neck squamous cell carcinoma with disease progression on or after platinum-containing chemotherapy. GlobalData forecasts that Keytruda will achieve peak sales of almost $500 million by 2024, in head and neck cancer treatment alone.
To make matters worse for Opdivo, South San Francisco-based Genentech, a member of the Roche Group, said in May that the FDA granted accelerated approval to its PD-L1 inhibitor drug Tecentriq (atezolizumab) for the treatment of people with locally advanced or metastatic urothelial carcinoma, or mUC, a specific type of bladder cancer.
At the end of August, Genentech said its cancer immunotherapy Tecentriq met its co-primary endpoints in the Phase III study OAK, and showed a statistically significant improvement in overall survival, or OS, compared with docetaxel chemotherapy in people with locally advanced or metastatic NSCLC whose disease progressed on or after treatment with platinum-based chemotherapy. Genentech’s Biologics License Application, or BLA, for NSCLC was granted Priority Review with an action date of October 19, 2016.
Conclusions
Shares of Pfizer have been on the decline since August, along with the S&P 500 Healthcare sector. In late August, the company announced the acquisition of Medivation, Inc. to expand its oncology product portfolio, and a month later, Pfizer made a surprise decision against splitting itself up, citing that it is best positioned to maximize future shareholder value creation in its current structure.
After its failed attempts for a merger with Allergan and AstraZeneca to bolster its drug portfolio, Pfizer will have to heavily rely on its current blockbuster drugs but those face growth challenges such as losing patent protection, competition from generics and biosimilars.
In order to get its revenues back on a growth path, M&A deals are still highly critical to Pfizer, either by more small acquisitions or a mega-merger, as revenues of its blockbuster drugs are shrinking and its own biosimilar business seems to be off to a slow start. A mega-merger, such as with Bristol-Myers, could help Pfizer create a robust global inflammation and immunology drug portfolio with several antiviral and cancer drugs. Pfizer’s stock will continue to underperform until investors are convinced that the company can achieve top line growth, reflecting the current valuation.
Disclosure: I am/we are long AGN, BIIB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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This article was originally published at the “Article” source noted above and distributed by The Tutu Project for informational purposes only.

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