Why Pfizer's Generics Unit Faces an Uphill Battle

Pfizer is to begin a big push into generics, and an equally important push to convince investors that this is a good idea. Sales at its existing generics unit are declining and there's reason to believe that even if that can be reversed, it might not be much of a money-maker. (BNET first noted the generics push would happen back in February, shortly after the merger with Wyeth).

The company wheeled out David Simmons (pictured), president of Pfizer's established products unit, at the Goldman Sachs Healthcare Conference in New York Wednesday to make the case. According to the AP, he said:

... the company recognized that the off-patent market "was very big, it was fast growing and the margins were actually better than anyone thought."

It's definitely big. As Bloomberg notes:

About a quarter of Pfizer's 2008 sales came from 300 products that have lost patent protection. Pfizer said in March it plans to add more than 200 pills and 60 injections to its generic business.

But is it "better"? Bloomberg:

Pfizer's generics sales declined 10 percent this year.

Leerink Swann likes Pfizer's new direction. In a note to investors, they said:

We view this discussion as evidence PFE is actively moving to a more flexible, logical & manageable structure ... PFE also has powerful sales forces in place in emerging market arenas where branded generics require a more traditional pharma model to compete in the marketplace.

I have no doubt that Pfizer can grow its generics sales, but there's considerable doubt as to whether it can maintain its margins while doing so. There are three reasons why:

This is a space filled with established experts both at home and abroad (Teva, Ranbaxy, Zentiva, Dr Reddy et al).
Competition in the space will only get more intense as more drugs come off patent -- so there will be automatic new entrants as legal barriers to entry get lower.
At the same conference, Abbott Labs chief Miles White said he is also interested in pursuing generics, maybe through an acquisition.

Put those factors together -- established expert competitors, declining barriers to entry and increased new entrants -- and what you have is a commodity market. The only successful way to compete in such an arena is on price and efficiency, and that means giving up your margins.

This is especially true if, as Leerink noted, Pfizer intends to increase its sales force costs in the promotion of those drugs.

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