This is a condensed public version of the Taking Stock in Pfizer (PFE) stock analysis made available via subscription to SAML subscribers. The full analysis, in PDF form with all accompanying data, can be purchased by readers at the bottom of this post.


A ‘Critical’ Analysis:

(Available with purchase of full analysis)

This segment contains an introductory discussion of Pfizer’s strategic dilemma in handling critical mass and what readers can identify as important fundamental themes during the stock analysis.


Company:

Pfizer is a global research based pharmaceutical company with a long corporate history dating back to 1849. The company strives to demonstrate that their products effectively prevent and treat targeted diseases, improve symptoms and suffering and that the company helps to form the basis for improvements in the healthcare system.

The corporate goal of the company is in “Developing medicines that meet medical need and that patients will take; that physicians will prescribe; that customers will pay for; and that add the most value for Pfizer.”

The company has a large portfolio of established drugs and operates globally in both developed and developing nations with a key focus on emerging markets. In 2007 the company published a number of key focuses that are targeted to improve business operations and increase shareholder value moving forward:

• Maximize short and long-term revenues
• Establish a lower and more flexible cost base
• Create smaller, more focused and more accountable operating units
• Engage more productively with customers, patients, physicians and other collaborators
• Change business operations to focus on shareholder value through growth of revenue and income
• Refocus and optimize patent-protected portfolio for new opportunities
• Create a culture of continuous innovation
• Investment in complimentary businesses
• Remain focused on pharmaceuticals & biotechnology (biotherapeutics)

In 2007 management began focusing on lowering their cost structure by reducing the number of employees across the company by 11,000. The company repurchased $10B in common stock for cancellation and began to aggressively push Phase II compounds into Phase III trials.

The majority of Pfizer’s current revenues are driven by a large group of established patent-protected medicines that in recent years have come under threat from lawsuits, patent expiration and generic competition. Lipitor, their flagship product, competes in a very competitive statin market (cholesterol lowering) and will lose its patent protection in November of 2011 when Ranbaxy is allowed to a sell generic version of the drug for a six month period.

The company has also set a number of commitments on a strategic management basis:

• Optimize product portfolio & accelerate product pipeline
• Establish smaller units of operation
• Expand into emerging markets
• Capitalize on established products
• Align cost structure with revenues
• Attain ambitious cashflow targets
• Refocus on capital allocation to maximize efficiencies

Drug/Clinical Development:

I want to provide readers with some background education on drug trials and clinical development in order for you to be able to put into perspective what Pfizer is currently doing and how successful they may/may not be with their ambitious plans.

There are a few key concepts I want to present first for each reader to keep in mind when analyzing any pharmaceutical company. The most important fact to be aware of is that every drug has a commercial lifecycle. A drug is born in the lab and progresses through clinical trials after which regulatory approval is required to sell to the public. A drug grows through exclusive marketing rights provided to a company and years later its’ patent protection expires where generic competition erodes revenues and margins. Clinical trials compose nearly 60% of total development costs in today’s market and the capital required for funding these programs has accelerated significantly over the past two decades.

A new drug is developed through a series of trials where the objective is to assess the safety of the compound in an environment of very high scientific standards. Through the entire process there is a massive amount of red tape that a company must go through in preclinical testing to advance the drug to clinical testing. Even once a drug makes it to a clinical phase there are numerous review boards and ethics committees who evaluate the danger to participants, the ability to obtain informed consent, methodology of the trial design and strict monitoring of participants for adverse side effects.

Phase 1
In this first phase an investigational drug is administered for the first time to humans after successful trials on animals. This clinical trial is focused on the safety and tolerability instead of the effectiveness of the drug and determines the pharmacokinetics (what the body does to the drug) and pharmacodynamics (what a drug does to the body) in a small randomized population. Investigators assess each participant’s response to the drug, absorption within the body, length of availability in the blood stream and what dosage levels are considered safe and well tolerated.

Phase 2
In the second phase the focus of the trial is to determine the effectiveness of drug in treating an illness or identified medical condition. Data on the safety, side effects and potential risks is collected and researchers work to determine the most effective dosages (tablet, extended release, controlled release, infusion, injection). This trial involves a larger number of participants; this time with participants who have the medical condition that the drug is intended to treat. This is the first stage where a placebo is introduced to determine environmental effect of the trial on participants.

Phase 3
The third clinical trial focuses on testing a larger population. This trial is randomized and has a double-blind approach where neither researchers nor participants know if they’re taking the drug or placebo until after the trial ends.