Pfizer Inc. (PFE), Eli Lilly & Co. (LLY), Bristol-Myers Squibb Co (BMY): These Pharmaceutical Giants Are Teetering Dangerously Near The Patent Cliff

In the hunt for sustainable dividend yields, investors have rushed into the stocks of major pharmaceutical companies. These stocks are widely bought for their blue chip status and hefty dividend yields. Investors likely feel peace of mind buying these stocks, as medicine and health care are fairly recession-proof.

At the same time, the industry is at an important inflection point. Several big pharma companies are struggling with patent cliffs, which have served as an anchor on growth.

All the while, big pharma stocks continue to grind higher, signifying that the bulls currently have the upper hand. Of course, momentum can reverse in a heartbeat. Therefore, should investors continue to believe in the rally? Or are big pharma stocks ripe for a pullback?

Staring into the void

It’s no secret that the pharmaceutical industry is grappling with a steep patent cliff. Several companies are losing patent protection on critically important drugs. For example, Pfizer Inc. (NYSE:PFE) once had the world’s best-selling drug, Lipitor, all to itself. Now Lipitor is under intense pressure from generic competition, and the resulting effect this has had on Pfizer Inc. (NYSE:PFE) can’t be ignored.

In its recent quarter, Lipitor raked in $545 million in sales. That’s an incredible amount of money, no doubt. However, consider that Lipitor brought in nearly $10 billion in sales as recently as 2011. At the time, Lipitor sales totaled almost as much as the company’s next three best-selling drugs combined. Fast forward to today, and Lipitor is Pfizer Inc. (NYSE:PFE)’s fifth-best selling drug.

Not surprisingly, the loss of patent exclusivity is having an undeniable effect on Pfizer’s results. Pfizer Inc. (NYSE:PFE)’s full-year 2012 sales fell 10%, which management blamed specifically on losing Lipitor.

This has extended into the current year. Sales through the first six months of 2013 are down another 9%.

Meanwhile, Eli Lilly & Co. (NYSE:LLY) has performed better than Pfizer Inc. (NYSE:PFE), because Eli Lilly isn’t facing as steep a patent cliff (yet). Total revenue climbed 6% in the second quarter, and earnings per share soared 34% year over year.

This is due largely to the success of Eli Lilly & Co. (NYSE:LLY)’s blockbuster drug Cymbalta. Sales of the drug increased 22% in the second quarter, and Cymbalta now accounts for 25% of Eli Lilly & Co. (NYSE:LLY)’s revenue.