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Four questions for Pfizer
Lipitor troubles loom as McKinnell gets ready to unveil guidance on Friday.
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - Pfizer, the behemoth of drug makers, is on the hot seat this week.

Pfizer (up $1.01 to $25.95, Research), the world's biggest drug maker with $51.3 billion in 2005 sales, faces a passel of issues: Its stock price is down about one-third from two years ago, its top-selling drug Lipitor faces anuncertain future, and the company scared investors last October by pulling 2006 and 2007 guidance, triggering a knee-jerk stock plunge.

Thus, Chief Executive Officer Henry McKinnell confronts a tough audience Friday, when his company unveils 2006 guidance for the analysts it alienated last fall. As part of its financial strategy, Pfizer said it will take a closer look at its consumer healthcare division, best known for Listerine and Purell hand sanitizer, which it might spin off, sell or retain.

"You're going to see a much more transparent and humbled management team with a lot more detail and granularity on a whole lot of issues, which is not characteristic of Pfizer historically," said Barbara Ryan, analyst for Deutsche Bank North America. "They have heard their shareholders loud and clear and recognize that they need to be transparent and more visible."

Here are four questions analysts want answered:

Lipitor: Is its future on thin ice?

The cholesterol-lowering Lipitor is the top selling drug of all time, and has been Pfizer's most dependable cash cow. The drug broke its own record last year with $12.2 billion in total sales. But sales slackened in the second half, raising questions of a downward trend.

Lipitor sales surged 24 percent in the first six months of 2005, but sales growth slipped to 1 percent in the third quarter. Pfizer spokesman Paul Fitzhenry said the significant slow-down in the lipid market in the U.S. contributed to the withdrawal of guidance last year, "until the completion of our annual planning process."

The new Medicare coverage could benefit drug makers, but not enough to pull them out of serious slumps. The research firm IMS Health projects the branded drug industry will get a sales lift from it of just 1.4 percent from 2006 through 2009.

But the cholesterol sector has already gotten a boost so far this year. Jami Rubin, analyst for Morgan Stanley, released a report Monday that projected a 17 percent jump in cholesterol drug prescriptions for the first quarter, based on activity in the first four weeks of 2006.

But this doesn't automatically translate into a sales boost for Lipitor. Merck's cholesterol-lowering drug Zocor, which made $4.4 billion in 2005, goes off patent this year, and some analysts believe that patients might dump Lipitor for a generic Zocor.

"If the cholesterol market continues to grow at 17 percent with the Medicare Modernization Act, that's very positive, but then you have to balance generic Zocor coming in June," said Courtney Kling, pharmaceutical analyst for TIAA-CREF, a pension fund that holds a large stake in Pfizer. "Lipitor could lose market share as generic Zocor gains market share, but if the market is gaining 17 percent, rising tides could lift all boats."

Patent loss: Just how bad is it?

Pfizer is facing a patent loss on another lucrative drug this year: Zoloft, the antidepressant that totaled $3.3 billion in 2005 sales. And in 2007, Pfizer stands to lose its patent on Norvasc, the blood pressure treatment that totaled $4.7 billion in 2005 sales. Also in 2007, Pfizer faces patent loss on Zyrtec, an allergy treatment with $1.3 billion in 2005 sales.

When a branded drug loses patent protection, sales typically plummet 80 percent within one year, and the fast-plunging sales are difficult to replace.

"Generally, in order to get a [new] product up to peak revenues, it takes three or four years," said Al Rauch, analyst for A.G. Edwards. "In contrast, when something goes generic, it goes generic rather quickly."

The company has also lost billions in sales due to the possible health risks of other drugs. Last year, the company's arthritis painkiller Bextra was pulled off the market because of side effects, wiping out $1.3 billion in annual sales. Celebrex, a similar Pfizer drug worth $3.3 billion, was allowed to remain on the market with a revised warning label, but revenue plunged.

Pipeline: Just how strong is it?

Pfizer hopes to offset its patent problems with a $4 billion cost-cutting initiative and an attractive pipeline.

The Food and Drug Administration recently approved Pfizer's Exubera, an inhalable form of insulin for diabetics, and Sutent, a treatment for stomach and kidney cancer. Last year the company filed an application for varenicline, its experimental smoking cessation drug, to the FDA.

But a rich pipeline is hardly a quick fix. Even if these drugs become blockbusters, as some analysts project, it could take awhile.

"New drugs are not going to build billion dollar sales in a few weeks," said Ryan of Deutsche Bank North America. "It takes years to do that."

Pfizer is also awaiting FDA decisions on its two applications for Indiplon, an experimental treatment for insomnia.

In addition, the company is conducting late-stage studies combining Lipitor, which lowers LDL or "bad" cholesterol, with torcetrapib, which increases HDL or "good cholesterol. This combo is a potential boon to the company. Last year, Michael Krensavage, analyst for Raymond James & Associates, projected annual sales of $25 billion for the combination, though these sales would decline dramatically after Lipitor loses patent in 2010 or 2011.

Hank: Can he save the company?

With such a complex blend of troubles and opportunities, it's difficult to project how Pfizer's earnings will shake out in 2006. So transparency is key to maintaining shareholder interest, analysts say, and all eyes will be on CEO Henry McKinnell as he faces analysts and shareholders.

"I think [McKinnell]'s certainly humbled himself in recent months after handling the third quarter in quite an aloof manner," said David Moskowitz, analyst for Friedman, Billings & Ramsey, referring to the meeting where McKinnell pulled guidance, inviting the ire of analysts.

"I think he's going to do his best to communicate that humility while at the same time demonstrate that Pfizer will rise again. McKinnell needs to give a little more detail on how they expect to achieve those goals, and if he can do that, he'll come out of this meeting looking good."

Analysts will also be watching the potential heirs to the Pfizer throne, such as vice chairmen Karen Katen and David Shedlarz.

But despite grumbles on Wall Street, McKinnell's job isn't up for grabs, said Rauch.

"I think there's some people on the Street who are somewhat dissatisfied with his tenure at the moment, but don't think there's any immediate threat to his position," said Rauch, the A.G. Edwards analyst. "I think it's very difficult to keep people happy when your company goes through something like this."

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To read about potential blockbusters from Pfizer and other drug makers, click here.

Moskowitz, Ryan and Rauch do not own Pfizer shares, but FBR and Deutsche Bank North America seek business with companies including Pfizer, and A.G. Edwards has received compensation from them in the last 12 months. Rubin owns Pfizer shares and Morgan Stanley received compensation from the company in the last 12 months. Top of page

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