Pfizer's $200 Million Mistake

Pfizer (NYS: PFE) and Biocon are getting a divorce. The press release said the companies had "individual priorities for their respective biosimilars businesses" -- the drugmaker-partnership version of "irreconcilable differences," I suppose.

But in most divorces, there's one party that's pushing for the split. In this case, I'd guess it was mostly Pfizer's doing.

In late 2010, the pharma giant licensed Biocon's insulin products -- both standard insulin and knockoffs of Sanofi's (NYS: SNY) Lantus, Novo Nordisk's (NYS: NVO) NovoLog, and Eli Lilly's (NYS: LLY) HumaLog. Considering they're all billion-dollar-plus drugs, there's certainly a demand for generics once the drugs go off patent in the U.S. In the meantime, Pfizer got to sell insulin in developing countries.

But generics are a low-margin business, and Biocon had to get its cut, further eroding the profit margin. At the time of the initial deal, I wondered if the investment in generic insulin was really the best use of resources. Apparently Pfizer's new CEO thought better of it.

Pfizer made an initial $200 million payment, which Biocon gets to keep. That's certainly disappointing, but sometimes you have to cut your losses. Not every drug deal is going to be a good one, and that goes double for a company that's doing as many deals as Pfizer does.

From the "irreconcilable differences" comment, it sounds like Pfizer plans to stick with other biosimilars, but the profit margins on those should be higher. Insulin is one of the oldest biologic drugs, if not the oldest. It was originally purified in animals in the 1920s. It seems reasonable to assume that multiple players will create copycats of Lantus, NovoLog and HumaLog. More competition means lower prices and reduced margins.

Newer and more complex biologics are better candidates for generic knockoffs, as they'll likely have less competition. They won't provide the margins seen with branded drugs, but there's considerably less risk and development costs, which should make for a decent return on capital.

Looking for a better return on your capital? Consider dividends. Fool analysts have some suggestions in their free report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." Get yours for free by clicking here.

At the time thisarticle was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.