Pfizer and the virtues of being big
Pfizer's very bigness insulates it from problems smaller drug company rivals have. That's especially the case when the danger of having major drug patents, like Pfizer's Zoloft,, run out, according to a Wall Street Journal article ("Biggest Drug Firm Faces Generics But Has an Edge: Its Very Bigness", 8/23/2004)
The phenomenon of having patents expire in the drug business is called facing "the cliff." As some of Pfizer's top drugs like Zoloft go off patent, it faces a loss of up to a quarter of its revenue to cheaper generic drugs. Cholesterol drug Lipitor, for example, brings in $10 billion a year. That's measured against $53 billion in revenues for the #1 drug company.
But Pfizer is leveraging its power in the market, according to the article:
Size especially matters in two areas. Pfizer is licensing many of the most promising new drugs from biotechnology or specialty pharmaceutical companies, overpowering rival bidders by committing its cash and huge sales force in an effort to turn the drugs into blockbusters someday. And in negotiations with major prescription-drug buyers in the U.S., Pfizer is using its clout to win favored treatment for its drugs
The way the arrangement with pharmacy benefit managers (PBMs) works is that Pfizer gives major discounts to these groups based on the number of their drugs that they carry as preferred drugs. With such a wide range of drugs that are leaders in specific areas, Pfizer can shut out smaller rivals who have less to offer the PBMs.
On the negative side, if the PBMs recommend a rival drug, they could have to pay higher prices for other Pfizer drugs. And while the PBM may want to drop the drugs entirely they will get objections for their customers who are bombarded with endless TV ads for Pfizer drugs like Celebrex, Zoloft, and Viagra.
As the WSJ article puts it, "Benefit managers say -- and Pfizer confirms -- that it drives a tough bargain on contract terms. It insists on prohibiting benefit managers from promoting other companies' drugs if Pfizer has a competing drug. It also shuns clauses -- common among other companies -- that allow either side to end the contract after giving 30 days' notice."
Pfizer also fills up its line by buying up drugs developed by innovative small companies (its record, like that of other big drug comapnies, at developing significant new drugs in its own labs is quite weak).
That's why Pfizer is also using its muscle to snap up promising medicines from small companies that need a marketing partner. Amid a research drought among big companies, the competition among them to acquire or license drugs has become increasingly ruthless. Pfizer has captured some of the biggest prizes, including treatments for multiple sclerosis, insomnia, and lungs weakened by smoking.
It's Pfizer's acquisition of Pharmacia last year that catapulted it into pre-eminence in the business. That pre-eminence is worth paying more than the book value of the acquired company.
