Monday, June 4, 2012

Pfizer's Upside Potential

Everybody knows that the major pharmaceuticals companies have faced myriad challenges over the last few years. The industry has had to deal with patent cliffs, fears over reimbursement adjustments, the FDA becoming more stringent over approvals, the increasing cost of research and development (R & D) and many other issues.

The patent cliff issue is immediately noticeable in the slowing revenue growth rates in this period and, this year in particular, is seen as the annus horribilis for big pharma. Pfizer $PFE is no stranger to these problems, and generic competition to cholestorel lowering blockbuster Lipitor is going to hurt inevitably Pfizer.

That said I thought it would be interesting to look at how Pfizer is dealing with the challenges and appraise some of its upside potential for 2012.

Pfizer Acquires and Restructures

The first part of Pfizer’s approach to dealing with its strategic challenges was to arrange a merger with Wyeth. It was a deal which gave Pfizer new expertise in large molecules, vaccines, and biologics. It has also generated significant cost savings.

The second part is to significantly restructure and refocus the business.  The management would like to sell the animal and nutritional health business, and continue the extensive buyback policy. As a consequence, R & D expenditure has been cut to about 12-13%

This is a relatively low number, but what will it do the all-important pipeline?

What is interesting in Pfizer's Pipeline?

Looking longer term, the pipeline focus has shifted towards oncology and pain disorder treatments. For example in 2012, Pfizer has phase III trials with Dacomitinib (non small cell lung cancer) and Intuzumab (lymphoma) but, the big kickers could come from Bapineuzumab and Tafocitinib. I want to focus on these two drugs in particular.

Bapineuzumab Makes a Comeback?

Bapineuzumab is a humanized monoclonal antibody that attacks amyloid-beta plaques that form in the brain of Alzheimer’s patients. Phase III results for North America are due mid year. Alzheimer's is the most common form of dementia and, an indication which has seen few treatment advances in recent times. As such, any successful drug is likely to be well received, especially in an ageing population.
The amyloid-beta theory (which this antibody relies on) has been challenged by high profile failures with Myriad Genetics Flurizan and even with Bapineuzumab previously.  In addition, Phenserine (amyloid beta modulator) failed in a previous phase III trial as did Tamiprosate which tried to inhibit amyloid beta plaque formation.

Amyloid-beta optimists will also want to keep an eye on Eli Lilly’s $LLY solanezumab and Morphosys’ gantenerumab which will both give results this year.  Gantenerumab, like Pfizer’s antibody, is an anti-amyloid-beta treatment (in early stage trials) and, based on previous drug class failures, I would cast doubt on its chances of success.

Solanezumab is a humanized monoclonal antibody which binds to soluble amyloid beta. It was taken to phase III on the back of safety data, rather than having achieved efficacy in Phase II. Solanezumab is believed to be similar to bapineuzumab but with less toxicity issues. The latter was found to cause brain inflammation in its highest dose in Phase II. Eli Lilly investors will be hoping to hit a home run with this antibody and, are results due this year.

What all of this drugs have in common is a reliance upon the theory that reducing amyloid beta plaques in Alzheimers patients will work to reduce the onset of dementia.

I think that the clinical evidence doesn’t bode well and, I would be surprised to hear good news on Bapineuzumab.  However, with three drugs giving results,  it is going to be a big year for the amyloid-beta theory!

Tofacitinib could be Pfizer’s next Blockbuster

On a more positive note, Pfizer’s Tofacitinib is the leading small molecule in a new class of drugs called Janus Kinase (JAK) inhibitors. A number of companies have been successful with JAK inhibitors in clinical trials, so there is ample clinical evidence to suggest that they work. Pfizer’s plan is for it to be initially approved for Rheumatoid Arthritis (RA) and then expand its indication to Ulcerative Colitis, Psoriasis, and Crohn’s disease.

In particular, JAK inhibitors are a class of drug being targeted for inflammatory diseases. Many of which, such as Ulcerative Colitis, are potentially fatal. Rheumatoid arthritis is chronic inflammatory disorder which tends to affect the joints and. disproportionally so in the elderly. The current treatments are some of the best selling drugs in the world.

Within RA, Pfizer has already filed and been accepted for review in the US and in Europe. In addition, a file has been submitted in Japan. What makes JAK inhibitors so attractive is that they tend to be taken orally via a pill.  This compares favourably with the previous class of RA treatments, namely TNF blockers. For example, TNF blocker biologic Humira is injected on alternate weeks, Enbrel is injected once a week, and Remicade is given intravenously every month or so.

The three afore mentioned TNF blockers are responsive in 70% of patients, including some who do not respond to the first line treatment of methotrexate. They are all expensive and have significant side effects.
I would expect Tofacitinib, if approved, to be immediately marketed to TNF non-responders and, then start to encroach on TNF-blockers market share. After which, Pfizer can create a market ‘buzz’ around its applicability for other indications. In short, this drug could be a huge blockbuster for Pfizer.

Potential Competition for Tofacitinib?

As mentioned above, Pfizer isn't alone in developing JAK inhibitors. Vertex Pharmaceuticals $VRTX showed significant results in a phase II in RA with its JAK3 inhibitor VX-509. A further phase II trial is planned. Similarly, Rigel Pharmaceuticals has entered into a Phase III with is RA treatment Fostamatinib.

Speaking of Vertex, it has long been touted as a takeover target due to its exciting pipeline and I wouldn't be surprised if a major pharmaceutical company stepped in and acquired the company.
Furthermore, Incyte $INCY in partnership with Eli Lilly, has two JAK inhibitors in development. INCB28050 is in a phase II for RA. Meanwhile, Jakafi (ruxolitinib) is already on the market for myelofibrosis and, Incyte has it in development for psoriasis and polycythemia vera as well.
Myelofibrosis is a disorder of the bone marrow, which tends to cause inflammation of the spleen.  Jakafi works to reduce spleen inflammation. The indications are that Jakafi sales are doing very well. This must surely resonate with the FDA in terms of their confidence with approving JAK inhibitors.
Both Vertex and Incyte will offer stiff competition to Pfizer.

Pfizer in 2012?

In conclusion, Pfizer investors can look forward to more restructuring in 2012. but there could be a lot of excitement around Tafocitinib being potentially approved. Incyte has already got a JAK inhibitor approved and, so far, the indications are that Jakafi is doing well. Bapineuzumab has probably been written off by most investors and, is unlikely to disappoint many. A failure is probably 'in the price'. Therefore, for long term income investors looking for some dividend with some upside potential, Pfizer offers a compelling mix.