Pfizer Inc. (PFE)’s New Model

Pfizer Inc. (NYSE:PFE) is trying a new sales paradigm, selling direct to patients. If this effort works, it could completely change the pharmaceutical industry.

Little blue pills

One of Pfizer Inc. (NYSE:PFE)’s best selling drugs is Viagra, which is used to treat erectile dysfunction. That particular ailment carries material social stigma and the pills, which are still under patent protection for many more years, can be expensive. That has proven to be a prime opening for counterfeiters.

Thus, online “pharmacies” have sprouted up selling pills that they claim are Viagra at deep discounts and, sometimes, without the need for a prescription. While most would see problems in this, enough patients are buying fake Viagra that it is a big issue.

To combat the counterfeiters, Pfizer Inc. (NYSE:PFE) is going to sell Viagra directly to patients. A prescription will still be required, of course, but it is a way to ensure that the real drug is dispensed. And that Pfizer Inc. (NYSE:PFE) gets its cut of the sale.

Fake drugs or…

Stepping back, however, this may not be about fake drugs. That story, while true, could be a good cover to try a new sales channel that cuts out the middle men. Taking out the drug wholesaler and the drug store means more money in Pfizer’s coffers. In fact, Fox News reportsthat the drug giant is offering discounts of up to 30% on direct sales.

That’s a big enough discount to attract customers that want to make sure they are getting what they pay for, but don’t want to pay full fare. However, there could be even more strategic decisions taking place.

Recurring payments

Businesses from magazine publishers to gyms to web sites work hard to get customers to agree to recurring credit card payment plans. In this model, a customer gives over a credit card and allows the card to be billed without pre-approval at some regular interval. Since many people don’t pay close attention to their credit card statements or get accustomed to seeing a recurring bill and start to overlook it, this can create an annuity like revenue stream.

Creating such relationships for name brand drugs would be a blessing for the entire industry. The biggest threat pharmaceutical companies have faced in the last decade is from generic competition. Industry players like Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) have built large businesses around generics.

However, if customers don’t have a middle man to inform them that a generic version of a drug is available, they might not know to switch. Essentially, complacency and a lack of information could result in Pfizer Inc. (NYSE:PFE) retaining a significant proportion of its Viagra sales when its patent protection runs out. That would be the big game changer.

Who wins/Who loses

Drug companies across the pharmaceutical industry would be clear winners from a direct to patient model. However, those selling frequently refilled drugs would be the biggest beneficiaries. For example, Novo Nordisk A/S (ADR) (NYSE:NVO) is a giant in the insulin market.

The company claims to have around a 50% market share based on volume and its diabetes business accounts for around 80% of its top line. If this company could create a direct to patient model, assuming Pfizer Inc. (NYSE:PFE)’s efforts succeed, it would notably tilt the industry’s profile and Novo Nordisk A/S (ADR) (NYSE:NVO) would clearly be leveraged to benefit.

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), meanwhile, would be an obvious loser. However, it has been using its cash-cow generics business to expand into branded pharmaceuticals, including the purchase of Cephalon’s branded drug business. That could provide a counterweight to any loss on the generic side. So, too, could the company’s efforts in the over-the-counter space, where it is partnering with consumer products giant The Procter & Gamble Company (NYSE:PG).

Still, if a direct to patient drug sales model emerges, those positives could get lost. So investors might want to keep an eye on the issue, and the market reaction, watching for a potential buying opportunity in Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). Novo Nordisk A/S (ADR) (NYSE:NVO), meanwhile, is worth watching regardless of Pfizer’s success, since diabetes, sadly, looks set to be a growing market.

Experimenting

This isn’t the first time that Pfizer has tried a new sales method. However, this could be an experiment that changes the entire drug industry. Investors should keep an eye on this issue. Success could mean a small near-term boost to Pfizer’s shares, but open up huge long-term growth potential for the entire drug industry.

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