Pfizer Stumbles in Q2 over Generic Competition

Pfizer's Profit Drops 48% in "Tough Quarter"

Pfizer's chief executive, Jeffrey Kindler, referred to the April-June period of 2007 as a "tough quarter" for the company in a conference call yesterday. The company's net profit declined by 48% year-on-year (y/y) in the quarter as pharmaceutical sales stumbled, declining by 7% globally and by 22% in the United States. Total revenue declined by 6%, while R&D costs and cost of sales increased by a 24% and 18% y/y, respectively. Operating income, according to Global Insight calculations, was down by 50% y/y, while the company's operating margin fell by 10.1 percentage points y/y to 26.8% in the second quarter. In comparison with the first quarter of 2007—which was not one of Pfizer's strongest quarters—operating income declined from US$5.561 billion to US$2.966 billion).

Top Products to Blame for Decline

Pfizer's revenue decline in the most recent quarter is largely attributable to generic competition—direct and indirect—affecting its top-selling products. Although the company has been successful in most markets in protecting its patent exclusivity for cholesterol-reducing drug Lipitor, sales of the latter declined abruptly as generic competition against rival statin Zocor took hold of the U.S. market. After an initial Lipitor decline, Pfizer announced in the first quarter that Lipitor sales in the United States were stabilising, but this conclusion now appears to have been premature. In the second quarter, Lipitor sales fell by 13% globally to US$2.7 billion. In the United States, the sales decline was 22% y/y, with sales totalling US$1.38 billion. Pressure to switch members of Prescription Benefit Management plans (PBMs) to generic copies of Zocor—costing just over one-third for a monthly supply at the most commonly prescribed dose compared with Lipitor—and higher discounting given by Pfizer to PBMs have been largely blamed for the Lipitor decline.

Pfizer's situation has been further exacerbated by generic completion against cardiovascular drug Norvasc (amlodipine besylate), whose sales declined by 45%. Sales of erectile dysfunction drug Viagra also fell by 3%, while Zoloft and Neurontin were down by 82% and 15%, respectively. Meanwhile, Exubera—the only inhalable insulin approved for marketing so far—has continued to disappoint with sales of only US$4 million in the quarter.

Outlook and Implications

Based on the evidence of simvastatin genericisation effects on Lipitor so far, Pfizer now expects full-year Lipitor sales to remain static worldwide or even fall by as much as 5% from last year's total of US$12.9 billion. While Pfizer reiterated its 2007 and 2008 full-year revenue and adjusted diluted EPS guidance (see table), its top-line performance remains plagued with challenges.