Kicking sand in Pfizer's face

NEW YORK (CNNMoney.com) -- Pfizer is not in the best of shape. The beating its stock took on Wednesday shows it. The question is, should the drug maker diet or bulk up?

New York-based Pfizer Inc., (down $1.09 to $24.87, Charts, Fortune 500) the world's leading pharmaceutical company in terms of annual drug sales, said on Wednesday that its revenue slipped 6 percent in the second quarter, to $11.08 billion, from $11.74 billion in the same period last year. Pfizer also reported a 16 percent plunge in earnings per share, to 42 cents, from 50 cents during the same period the prior year.

The news sent Pfizer's stock, already showing a flat performance for the year, went down over 4 percent.

Projections from analysts, as compiled by Thomson Financial, were for a 3 percent decline in revenue to $11.4 billion from one year ago, and only a 1 percent slip in EPS.

"They're too big and they need to be smaller," said Les Funtleyder, analyst for Miller Tabak, who believes that Pfizer's sales are too prodigious to grow. "They're getting there, though."

Pfizer chief executive Jeffrey Kindler blamed the company's subpar earnings on low-cost generic competition to the antidepressant Zoloft and the blood pressure drug Norvasc, former blockbusters that lost patent protection in 2006. Also, sales for the cholesterol-cutting Lipitor declined more than expected. For now, Lipitor remains the world's top-selling drug, despite a 13 percent decline in quarterly sales to $2.7 billion.

Even though Lipitor's patent expiration is four years away, Funtleyder said that generic versions of Zocor could be cutting into Lipitor sales, as well as the competing drug Vytorin from Merck & Co., Inc. (down $0.71 to $49.56, Charts, Fortune 500) and Schering-Plough (down $0.25 to $31.94, Charts, Fortune 500).

Pfizer's pipeline is a top concern for analysts, who say the company does not offer products promising enough to replace its flagship drug.

"There's nothing in the pipeline that holds a candle to Lipitor, which is why the stock doesn't trade on the earnings," said Barbara Ryan, analyst for Deutsche Bank North American. "It trades on the basis of its dividend yield, not on the basis of its earnings."

Ryan said that the company's 4.6 percent dividend yield could keep the stock from slipping below $25 a share. But she said the most obvious way for Pfizer to recover from its financial woes is to buy a smaller company with potential blockbusters in its pipeline.

"The company needs to make a significant acquisition, and that's the only way to dilute their dependence on Lipitor," said Ryan.

Johnson & Johnson (down $0.53 to $62.21, Charts, Fortune 500) trumped Pfizer in 2006 as the top-selling pharmaceutical company, though much of J&J's sales come from medical devices and consumer products, so Pfizer remains the top-selling drugmaker.

The analysts interviewed for this story do not own Pfizer stock, but Deutsche Bank seeks to do business with the company.