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Job cuts ahead for Pfizer?
Analysts say no. 1 drugmaker needs to cut costs as lucrative products face patent expirations.
April 4, 2005: 6:52 AM EDT
By Aaron Smith, CNN/Money staff writer

NEW YORK (CNN/Money) - As it prepares for its latest round of analyst meetings this week, pharmaceutical giant Pfizer faces a range of difficult choices in wrestling with soon-to-expire patents on several key drugs.

Job cuts and a scaling back on research are among the company's options, industry analysts said.

In 2007, Pfizer (down $0.12 to $26.15, Research) will lose patent protection of Norvasc, used to treat high blood pressure. The drug is Pfizer's second-biggest seller with $4.5 billion in 2004 sales.

The company's current pipeline of drugs in late-stage development, however, does not contain enough promising new products to make up for impending losses of Norvasc and other soon-to-expire patents, according to analysts.

Pfizer has also been battling patent challenges to other blockbuster drugs -- notably Lipitor, its cholesterol-lowering medicine and top seller, Zoloft, an anti-depressant, and Viagra.

Last Tuesday, the company said it would appeal the Austrian Patent Office's decision to invalidate the patent on Lipitor, which racked up $10.9 billion in sales last year.

On Wednesday, a federal judge in Los Angeles forced Israeli firm Teva Pharmaceuticals (Research) and Indian firm Ranbaxy Laboratories (Research) to stop selling generic versions of Accupril, a blood pressure treatment with $665 million in 2004 sales.

In January, a federal judge threw out Teva's lawsuit challenging the patent on Zoloft, which brought in $3.4 billion for Pfizer last year. And last year, the Chinese government overturned the patent on Viagra -- a decision Pfizer has appealed.

Analysts are curious

Pfizer may address some of these issues when it meets with industry analysts Tuesday. The company, which reported $52.5 billion in revenues last year, is likely to talk about cost-cutting efforts without discussing individual patent problems.

The drugmaker may cut its sales force overseas in a bid to save $1 billion to $1.5 billion, Banc of America Securities analyst C.J. Sylvester wrote in a recent report, though he did not specify how many jobs might be cut.

Pfizer's U.S. sales force won't get slashed, according to Sylvester, because domestic sales have jumped 90 percent since 1998, while the sale force expanded less than half that rate.

"We believe that any cuts to the sales force will come from overseas, where the sales force is less efficient," wrote Sylvester, who gave the stock a "neutral" rating.

Other analysts believe that Pfizer will leave its sales force alone and trim the fat out of research and development units.

"I think a lot of people are expecting them to come out with cuts in marketing, but our expectation is that they're going to reduce R&D efforts," said A.G. Edwards analyst Al Rauch, who gave the company a "hold" recommendation.

Annual R&D costs have jumped to $7 billion last year from $1 billion in the early 1990s, said Rauch. About half that cost goes to early-stage drug development.

"We think it might make sense for them to try and focus on what they do well, which is Phase III testing and marketing," said Rauch, who expects Pfizer will "let someone else do the early stage work," and then buy the companies to put their products through late-stage testing.

Pfizer will have to find ways to offset losses when it starts losing patents on some of its lucrative drugs. Sylvester estimated impending sales losses could be as much as $14 billion -- or about 27 percent of last year' sales.

"A lot of their big drugs are going to lose patent protection, without the introduction of new drugs that will offset that," said Barbara Ryan, analyst for Deutsche Bank North America, who nevertheless rates Pfizer stock a "buy."

Antibiotic's patent lapsing

Pfizer will lose patent protection in November for antibiotic Zithromax, which brought in $1.9 billion in worldwide sales last year, followed by Zoloft in 2006. In 2007, Pfizer will lose patent protection on antihistamine Zyrtec, which took in $1.2 billion last year, and Norvasc, which brought in $4.5 billion.

Ryan said the drugs in Pfizer's pipeline, which includes blindness treatment drug Macugen, insomnia treatment drug Indipoln, and painkiller Lyrica, won't bring in enough revenue to replace its impending losses.

Pfizer spokesman Daniel Watts declined to provide revenue estimates on these products-in-testing and would not provide details about what management will discuss at next week's meeting.

Banc of America's Sylvester said the Lipitor challenge is a "major overhang" on Pfizer stock, which is off about 25 percent from a year ago.

Merck (Research) has also lost about a quarter of its value over the last year, though other competitors have prospered, with Bayer shares rising by nearly a third and Novartis gaining 10 percent.

With all these difficulties, Pfizer is wise to air them in a meeting, analysts said.

"I'm sure with skepticism and all kinds of rumors running around it will be better for them to clarify their strategy," said Sena Lund, analyst for Cathay Financial, who recommends Pfizer with a rating of "outperform."

See how Pfizer shares measure up to rivals.  Top of page


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