Pfizer Ditches Exubera After Challenging Third Quarter

Pfizer's Net Profit Dives 77% on Exubera Charges

Pfizer (U.S.) released results from another challenging quarter yesterday as generic competition and disappointing performance of inhalable insulin Exubera undermined revenues. The quarterly results are further marred by sizeable—and as of yesterday unforeseen—charges related to Pfizer's decision to end marketing of Exubera.

The charges—already reflected in Pfizer's third-quarter results—amount to a total of US$2.8 billion, and include:

• Intangible asset impairment charge: US$1.105 billion;
• Inventory write-off: US$661 million;
• Fixed-asset impairment (FAI): US$454 million; and
• Other exit costs: US$584 million.

All in all, the Exubera exit has affected most of Pfizer's topline results in the third quarter. The charges are included in cost of sales (US$2.6 billion), sales, informational and administrative expenses (US$83 million), R&D expenses (US$131 million), and revenues (US$10 million for an estimate of customer returns).

Pfizer's operating margin (already faltering in the last quarter) has seen a dramatic reduction: y/y it fell by 24.6 percentage points to 13.4% (the type of operating margin rarely seen for pure research-based pharmaceutical companies, unless they are coping with the effects of a massive M&A deal). Even for a company as large as Pfizer, the US$2.8-billion cost of the Exubera fiasco has clearly taken its toll.

Pfizer Takes Stock as Generics Attack

A look at Pfizer's portfolio performance, product by product, doesn't produce any surprises. The loss of U.S. market exclusivity for Norvasc and Zoloft again offset sales gains from new products and the favourable US$860-million contribution of currency exchange rates. Sales of Zoloft and Norvasc declined by 54% y/y in the third quarter.

On the positive side, Lipitor—by far the company's highest-selling product—has managed to hold on well in the face of increasing generic competition from copies of former branded rival Zocor (simvastatin; Merck; U.S.). Lipitor sales declined by 5% in the third quarter to US$3.2 billion—significantly less than the 13% y/y decline recorded in the second quarter. The company now estimates that full-year worldwide Lipitor sales will be only 3-5% lower y/y.

Outlook and Implications

The previous forecast for Lipitor (atorvastatin) sales was for a 5% decline, and thus the new guidance of 3-5% decline is highly positive. Not much has changed in Pfizer's full-year earnings forecast for 2007 and 2008. The guidance released yesterday leaves the previous forecast for 2008 untouched, while for 2007 it only raises the lower range of both the estimate for adjusted income (by US$0.2 billion) and the estimate for adjusted diluted EPS (by 0.2%).

On a global scale, the Exubera withdrawal should be seen as a positive outcome for Pfizer. Having paid Sanofi-Aventis (France) US$1.3 billion for its share of the development rights and spent heavily on the promotion of Exubera, Pfizer is not cutting its losses. The final cost, as reflected in its third-quarter results, is a whopping US$2.8 billion dollars, making Exubera the most expensive flop in the pharma industry history. The inhalable insulin also has the dubious distinction of being the first high-profile drug that has made it through development and approval only to be taken off the market for not selling enough.

The bitter lessons that Pfizer has learned from its Exubera venture will have widespread repercussions for the industry. The developer of the inhalation device, Nectar Pharmaceuticals—which found about Pfizer's decision to end marketing the product a few minutes after the press release was issued—is already feeling the pressure. The company has rushed to defend the viability of its remaining pipeline development projects and says that it is evaluating all options. These options, however, are limited. Questions are being raised as to who exactly will take on Exubera (both to manufacture and sell) after the world's largest drug-maker with its massive sales machine decides it is no longer worthwhile.

"We clearly underestimated the barrier to moving patients or the physician community earlier to Exubera," Pfizer's president of worldwide pharmaceutical operations, Ian Reid, admitted. Once expected to be a blockbuster drug with sales of US$2 billion plus, Exubera garnered only US$12 million this year (following a 2006 launch).

The challenges that Pfizer faced in convincing patients to use a bulky inhaler and to start treatment earlier are here to stay. The medical community, meanwhile, has remained sceptical about the long-term effects of inhalable insulin on the lungs (as only 10% of the insulin inhaled enters the blood stream), despite Pfizer's costly research indicating no long-term damage to lung function. Label restrictions and the sheer amount of time doctors need to spend educating patients on the use of Exubera have also taken their toll. Perhaps, Pfizer's basic premise that patients would prefer inhaling insulin rather than having daily injections was flawed. Regardless of the reasons, other major players in the industry are expected to take stock of their inhalable insulins in development in light of Pfizer's move. Eli Lilly (U.S.), which yesterday rushed to defend its own inhalable insulin device (admittedly smaller than Pfizer's), is poised to file for approval in 2009. Novo Nordisk (Denmark) also has a device with a liquid aerosol form of insulin rather than powder, which could be ready for approval filing in 2009-10. Abbott (U.S.) is also working on an inhalable insulin device, according to the Wall Street Journal.