The Pfizer dilemma: Spurned by AstraZeneca, revenue falling and facing an R&D crisis

Pfizer CEO Ian Read

Pfizer is in a nasty fix. Tomorrow the pharma giant ($PFE) will release a rundown of its Q2 numbers--which won't be pretty--and CEO Ian Read and his top team will have plenty of explaining to do about how they plan to get out of the tight spot they find themselves in.

Up until its ill-fated attempt to buy out AstraZeneca ($AZN) in a megamerger earlier in the year, Pfizer had kept the narrative on the company focused on its reorganization and the likelihood of a big breakup. R&D costs had been hacked down by billions of dollars in a head-to-toe restructuring. Its one big drug in the clinic, the cancer drug palbociclib, had plenty of admirers among the ranks of analysts, many of whom had anticipated Pfizer's decision to file for an early approval based on mid-stage data.

But now the drug looks somewhat less impressive after the last data batch, the rest of the much-reduced pipeline has failed to generate much (or any) enthusiasm and its failed takeover has created a sense of impending disaster as revenue continues to fall.

Mark Schoenebaum, the big pharma specialist at ISI, noted over the weekend that Pfizer needs to "explain (again) why you went after AZN and why PFE is OK without it." Not only that, he adds, Pfizer needs to "show us the goods" in the pipeline and see if it can generate some excitement, as well as explain why it shouldn't just cut R&D more and use the cash to buy biotechs that do have exciting pipelines. Adds Schoenebaum:  "Convince us your current level of R&D spending is productive."

Analysts can expect to hear a lot about Pfizer's decision-making in R&D recently, particularly after last week's news at Puma Biotechnology. Puma took a cancer drug that Pfizer spun out during its reorganization (neratinib) and put it through a successful Phase III study. And the positive news was delivered simultaneously with the announcement that Pfizer had agreed to lower the cap on its royalty rate. Now Pfizer,which has failed to deliver expected sales on its most recently approved drugs, has to explain why Puma can successfully run a late-stage study on a drug it once owned while agreeing to take a lower reward. Puma licensed the therapy--widely expected now to go on to blockbuster status--in a deal that included only $187 million in projected milestones.

"Pfizer is in a very desperate spot, having seen most of its pipeline disappoint and facing multiple patent expirations," Sphera Fund analyst Ori Hershkovitz tells Reuters' Ransdell Pierson, who wrote about the Pfizer dilemma in detail. "It needs growth; it needs to buy a pipeline."

This crescendo of criticism is, ironically, likely to add to the pressure on Read to go back and execute a takeover of AstraZeneca at a big premium, completing another tax inversion even though Pfizer's megamergers in the past have provided a rich fodder for researchers looking for examples of how that strategy has failed to work. Barring an AstraZeneca takeover, Leerink is suggesting that Pfizer could work out a buyout of Dublin-based Actavis or switch its sights to UCB or Switzerland's Actelion, with other analysts suggesting big biotechs like Vertex or Celgene.

SunTrust Robinson Humphrey analyst John Boris told the Wall Street Journal last week that he liked the idea of an Actavis buyout as well, with Mylan offering a less appetizing alternative. But with Pfizer's U.S. sales dropping to 38% of its total next year – a perilous situation, as the U.S. is the only country where companies set their own price on drugs – a buyout is almost mandatory for Pfizer.

In short, Read can expect plenty of advice as he sweats out the numbers for Q2. Right now, Pfizer can't just sit and wait for more data on its star lineup of experimental drugs, a strategy that has worked, so far, for Eli Lilly ($LLY). Unlike Lilly, Pfizer doesn't have a star lineup. And with Celebrex slated to lose patent protection later in the year, with Viagra to follow in 2017, the pressure to do something dramatic is only going to grow.

- here's the story fom Reuters

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