Shaking out Pfizer's pipeline

NEW YORK (CNNMoney.com) -- You'd think 12,000 scientists could fill a drug pipeline. And they probably can. But can they fill it to Wall Street's satisfaction?

Pfizer will find out soon. On Nov. 30 analysts will converge on the company's R&D facility in Connecticut to see what the company has on deck. It'll be a tough show.

"In order to impress me, they need to show a bunch of new compounds, things that nobody's ever seen before" in relatively uncompetitive areas of the healthcare market, said Les Funtleyder, analyst for Miller Tabak. "What I do not want to see is another blood pressure drug, for example."

Big Pharma has been getting squeezed by competition from generic drug companies as patents expire on multi-billion dollar blockbusters. Pfizer's patent on Zoloft -- an antidepressant with $3.3 billion in 2005 sales - ran out in June this year, and its patent on Norvasc, a blood pressure treatment with $4.7 billion in 2005 sales, is set to run out in 2007. Pfizer, like its rival drug giant Merck (down $0.62 to $44.44, Charts), has launched aggressive multi-billion dollar cost-cutting programs to take the sting out of patent losses, but it will need to secure new blockbusters in order to achieve the double-digit sales growth that makes investors happy.

The biggest fish in Pfizer's pipeline is its experimental cholesterol drug combination, adding the world's top-selling drug Lipitor with the drug-in-testing torcetrapib. Pfizer, which leads the European companies GlaxoSmithKline (down $0.08 to $51.92, Charts) and Sanofi-Aventis (up $0.15 to $42.61, Charts) as the biggest drugmaker in the world, has two potential cancer drugs in late-stage testing, including ProMune for lung cancer and ticilimumab for melanoma, a serious form of skin cancer.

Pfizer recently caused a flap with the American Heart Association, when it unveiled data for the Lipitor-torcetrapib combo on Oct. 31. The AHA claimed that Pfizer broke an embargo by releasing the report two weeks before the scheduled release at the annual conference in Chicago. But this doesn't change the fact that analysts see the data from this late-stage study as positive.

The Lipitor-torcetrapib study, which focused on patients who are genetically disposed towards high cholesterol, demonstrated a 27 percent drop in low density lipoprotein, otherwise known as LDL or "bad" cholesterol, and a 56 increase in high density lipoprotein, also known as HDL or "good" cholesterol. Lipitor is a cholesterol-cutting drug, and the addition of torcetrapib adds the ability to increase the beneficial HDL.

"We all know that the drug raises HDL by a powerful degree," said Barbara Ryan, analyst for Deutsche Bank North America. "The question is: what is the benefit of that? The benefit remains to be seen."

Pfizer is planning to release more Lipitor-torcetrapib data in March from a study involving patients in a wider population, said Pfizer spokeswoman Vanessa Aristide. The study will use imaging technology to show the effects on plaque reduction in the arteries and will provide more information about the combo's effect on blood pressure, said Aristide.

Lipitor sales totaled $12.2 billion in 2005, the top annual tally for any drug. Pfizer, led by newly-appointed chief executive Jeffrey Kindler, is aiming for $13 billion in Lipitor sales this year, with revenue for that drug totaling $9.5 billion in the first nine months.

Pfizer (Charts) has spent about $800 million studying the Lipitor-torcetrapib combination. Will it pay off?

Jon LeCroy, analyst for Natexis Bleichroeder, believes that the combination will make money, but only by taking it from existing Lipitor sales. LeCroy projects a 2008 launch for the combination, making $250 million that year in addition to Lipitor sales of $12.5 billion. LeCroy estimates that the combo will surge to $2 billion in sales the following year as Lipitor sales dip to $11.2 billion. LeCroy sees Lipitor dropping to $7.3 billion in 2010 as the combo grows to $4 billion, with Lipitor dropping to $5.9 billion in 2011 as the combo swells to $7 billion.

"We're modeling pretty heavy cannibalism, with sales for the combo taken right out of Lipitor," said LeCroy. "We don't have it adding sales. It's difficult to imagine that they can grow the total franchise substantially because [Lipitor] is such a big drug."

LeCroy said that Pfizer will have a hard time replacing lost revenue with its incoming cancer drugs. LeCroy projects that ProMune, an experimental lung cancer drug that Pfizer licenses from Coley Pharmaceuticals (down $0.11 to $12.86, Charts), will launch in 2008, with annual sales reaching $700 million by 2010. The analyst projects that ticilimumab, the potential treatment for melanoma, will enter in the market in 2008 with annual sales reaching $325 million by 2010. Pfizer is partnering with Abgenix, which was acquired by the biotech leader Amgen (up $0.33 to $72.84, Charts) in 2005, for developing ticilimumab.

Investors have brought up Pfizer's stock price about 17 percent this year, beating the S&P 500 gains by more than 4 percent. This follows a 6 percent drop in stock price the prior year, when Pfizer under-performed the S&P by 14 percent.

What do analysts want to see from Pfizer going forward?

Funtleyder said that analysts would be impressed by new and unique drugs in promising areas of the market, like cancer and heart disease, even if they're in the earliest stages of experimentation and years away from entering the market. But the pipeline will only impress if these drugs-in-testing are newly-discovered compounds, not improved versions of existing compounds, known in the industry as "me-toos."

"If [Pfizer] can do that, then I think [the analysts] will all come away favorably impressed," said Funtleyder. "Right now, I suspect that it's going to be more of the same, but I am converting to optimism. Ultimately, pharma companies will have to develop new drugs: new-new, not new-old."

The analysts interviewed for this story do not own shares of Pfizer stock, though Deutsche Bank North America might have done investment banking services for the company.