How to Play It: Pfizer's Lipitor to Go Generic At The End of Month

On November 30, Pfizer's

blockbuster drug Lipitor will face generic competition. Lipitor, a cholesterol drug, is the best selling drug of all time. An Indian company called Ranbaxy Laboratories will begin selling a generic version of the drug (atorvastatin) at the end of the month after a settlement with Pfizer. Originally, Ranbaxy wanted to sell the drug in 2010 when the basic patent expired. A legal battle ensued, however, with Pfizer arguing that auxiliary patents would keep the drug secure until 2016. Eventually, a settlement was reached between the two companies and now Lipitor in generic form will be available within days. The loss of the drug is expected to cost Pfizer (

) as much as $10 billion per year in revenue - a fact that is already priced into the stock. Pfizer's multiple has been shrinking in recent years, and the stock is quite cheap on a valuation basis. PFE shares trade at a trailing P/E of 14 and a forward P/E of 8.67. Growth is expected to slow in coming years, in large part as a result of the loss of the Lipitor patent. Analysts estimate that PFE's earnings will grow at a rate of 3.43% over the next five years versus an industry average of 11.19%. This is a mature company, but investors should not despair, because PFE makes up for its slowing growth with a very attractive 4.10% dividend yield. In sum, the expiration of Lipitor has been priced into this stock for years now, and there is not a Lipitor-specific catalyst for a trade in PFE. Long-term, income oriented investors, however, may be interested in this name due to its blue-chip status, modest valuation, and juicy dividend yield. The stock that investors looking to capitalize on generic Lipitor should be focusing on is Teva Pharmaceuticals

. According to a recent Reuters report, Teva may be readying to sell its version of Lipitor as soon as November 30. Teva, an Israeli company, is the largest generic drugmaker in the world. According to analysts, just one month of generic Lipitor sales this year could add $0.10 to the company's 2011 earnings per share. Teva first needs to obtain regulatory approval, so the timing of a launch is still up in the air. On Monday, TEVA shares have rallied almost 2% to $41.67 on the news. Furthermore, analysts believe that problems with Ranbaxy's scheduled launch of the drug is making it increasingly likely that the two companies may strike a partnership. "We continue to believe that Teva will become a partner for generic Lipitor," said Brad Gastwirth, co-founder of ABR Investment Strategy. He added, "We continue to hear significant manufacturing issues at Ranbaxy, India's largest pharma company, and we think a Ranbaxy/Teva partnership is likely." Other analysts, however, believe that Teva is working to strike a partnership with Pfizer. Sanford Bernstein analyst Aaron Gal said that he thinks Teva has a deal with Pfizer, not Ranbaxy. The final company involved in this saga is Watson Pharmaceuticals

, which will also be selling generic Lipitor at the end of the month. This information, however, has already been priced into the stock, and as such, the opportunity appears to be limited. The role of Teva, however, continues to be shrouded in mystery and this uncertainty is offering investors an opportunity for risk and reward. A favorable announcement from the company - either a partnership with Ranbaxy, a partnership with Pfizer and/or Watson Pharmaceuticals to make the generic version of Lipitor (as has been rumored), or an independent entrance into the generic Lipitor market - could send the shares appreciably higher. On the other hand, a delay or a disappointing announcement could cause the shares to fall in the coming weeks and months.