Two Big Drug Dogs

02/18/2010 1:00 pm EST

Focus: STOCKS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says Pfizer and Merck face real challenges to franchise drugs in the months ahead, and their fortunes could decline.

Pfizer (NYSE: PFE) was at one time the most popular and widely held stock in the world. And as a short, it is a perfect story stock. The story in this case is [anticholesterol drug] Lipitor—and the coming competition.

The Lipitor patent expires in November of this year. Teva Pharmaceutical Industries (Nasdaq: TEVA), the world’s largest and best generics firm, filed an application for generic Lipitor in April 2008. Teva could, theoretically, begin selling generic Lipitor when the patent expires.

Pfizer has no answer to this problem. Its planned replacement product, torcetrapib, failed in trial; it bought Wyeth, but the combined company is unable to stimulate organic growth, and last quarter's earnings showed the company is [still] overly dependent on Lipitor.

How dependent? Lipitor will account for $11 billion to $12 billion in sales, (about one-quarter of total revenues—Editor).

ChangeWave surveys show when a statin comes off patent, the company that makes the proprietary version should see a sales loss of 80% or more. That is $8-billion-plus in sales lost, and maybe half that in profit.

Pfizer is an excellent long-term short as Wall Street finally recognizes the impact of the Lipitor patent expiration.

Buy the PFE June 17.00 Puts (PFE100619P00017000) under 98 cents and the PFE January 2012 15.00 Puts (WPE120121P00015000) under $2.00. (Both closed below those prices Wednesday—Editor.)

Merck (NYSE: MRK) has been a well-groomed dog for a long time: New product approvals that did little to arrest the real long-term stagnation of the company have supported the stock price for too long, but the game is up!

One key patent [expired recently] on a key drug, Cozaar. In the third quarter, the drug generated $891 million in sales, or almost 15% of revenue. Generic sales should take away 60%-80% of that revenue.

What can replace it?

In the past couple of years, the diabetes drug Januvia and sexually transmitted disease vaccine Gardisil have boosted the stock. Januvia’s sales rose to almost $500 million in the [third quarter], but fierce competition is coming, specifically from Amylin Pharmaceutical's (Nasdaq: AMLN) Byetta.

The current version of Byetta was just approved as a stand-alone diabetes treatment and will compete head to head with Januvia. Meanwhile, Gardisil’s sales plunged 22% in [the third quarter]. Other big-time Merck drugs, Zetia and Vytorin, are both losing share to generics.

So, no real growth ahead, and an important drug for the company that generates 15% of revenue is coming off patent.

Buy the Merck May 32.00 Puts (PGQ100522P00032000) under $1.80 [and the] January 2011 30.00 Puts (VMK110122P00030000) under $2.32. (Both closed below those levels Wednesday—Editor.)

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