Perhaps nothing defines today's pharmaceutical industry as accurately as the "patent cliff." The expiration of the patents of numerous high-selling, high-profile drugs has dominated the industry like no other topic in 2012. Perhaps no company was harder hit than one of Big Pharma's biggest players: Pfizer .

The company's best-selling drug has faltered after losing patent protection back in 2011, with sales down heavily. Don't tell the company's stock, however: Pfizer has performed extremely well for investors in 2012, with shares up 14.6% year to date. So which Pfizer is the real story: The one of falling revenues after coming face-to-face with the patent cliff, or the one prepared to face a new day with a solid pipeline and restructuring ongoing?

Lipitor, losses, and laggards
Undoubtedly, the loss of patent expiration on the best-selling drug  in history, cholesterol-fighting Lipitor, has seriously damaged Pfizer's 2012. While Lipitor technically lost protection in November 2011, it's this year's sales that have shown the brunt of the hit from generic competition, developed  from the likes of competitors Ranbaxy International and Watson Pharmaceuticals .


For the first nine months of the year, sales of Lipitor have fallen more  than 50% due to the loss of patent protection. The third quarter alone saw sales of $749 million for Lipitor -- after 2011's third-quarter sales of $2.6 billion. While Pfizer's best product has dwindled, other drugs have seen sales decline as well. Sales of  Prevnar 13 and Prevenar 13 -- which combined recorded more than $1 billion in Q3 2011 -- have fallen through this year's first nine months, while several other high-sales drugs have also declined on revenue.

That's not to say it's all bad on the sales side of things. Anticonvulsant drug Lyrica is Pfizer's latest and best hope for the future, exceeding $1 billion in sales in the third quarter  to post year-over-year gains of 12% for 2012 through nine months. Lyrica's patent for its basic product  doesn't expire until 2018, giving Pfizer plenty of time to milk the drug for all it's worth. Still, Lyrica hasn't shown it's anywhere close to replacing Lipitor's losses just yet and still faces competition from the likes of Eli Lilly's once-daily Cymbalta and others. Other products are also facing generic competition now  or soon, such as glaucoma treatment Xalatan from Mylan . Xylatan and Xalacom have seen sales decline by more than a third this year  through nine months after posting nearly $1 billion in sales during that time frame last year.

Pfizer does have a huge pipeline of drugs, however, with a whopping 87 drugs in clinical or regulatory stages back in August. Nonetheless, the company's been cutting back  on research and development costs during the year -- an appropriate measure given Pfizer's revenue declines even while the company's managed to increase earnings, but a measure that could come back to haunt it in the future. While earnings growth has managed to boost Pfizer's stock performance this year, its short-term cost-cutting solutions can't keep it going forever.

Restructuring and refocusing
Pfizer has made its future path clear in 2012: It intends to build tomorrow around its core pharmaceutical business to improve operational efficiency. Gone is the company's nutrition  business, sold in April to Nestle for $11.85 billion in what was at the time the largest acquisition by a European company ever. With the division recording  $2.1 billion in 2011 sales, however, it looks like the nutrition sale's substantial price tag was a high point for Pfizer's 2012.

As Pfizer continues to focus more on pharmaceuticals, it announced earlier this year that it filed for an IPO for its animal  health division Zoetis, the first step to spinning off the branch completely. Animal health sales amounted to more than $3 billion through the first nine months of 2012 and grew  by 17% in 2011.

If the company can grow more efficient by focusing solely on pharmaceuticals and its consumer health division (which has recorded little growth over 2011 so far), than the divestures will be worth it. If not, than Pfizer will have shed some growing branches and will lose ground to rivals; competitor Merck has seen its animal health branch develop  as a growth segment while so far keeping  the division as part of its company.

Pfizer has scored a few victories in drug approvals this year, however. The company's rheumatoid arthritis drug Xeljanz scored FDA approval in November, with the possibility of reaching $2 billion in sales while competing against Abbott Labs' Humira and Johnson & Johnson's Remicade. In September, the FDA also set a new PDUFA date  for March for Pfizer and partner Brystol-Myers Squibb's blood-thinning agent Eliquis. Pfizer could see huge sales  from this drug should it clear regulatory hurdles.

Finally, Pfizer's also been conducting layoffs  in accordance with its refocusing around pharmaceuticals and coping with the loss of Lipitor's exclusivity hurting its top line. It's a painful process that's been going on for years, but Pfizer can't argue with the savings that such cost-cutting measures could reap.

A good year for investors leaves a cloudy future
While Pfizer's stock has done quite well this year, the company's moves have left it in a tight space for the future. In narrowing its focus toward its pharmaceutical segment, Pfizer will have to continue developing its pipeline or snapping up small, promising biotech companies in the future to sustain its success, particularly with the Lipitor losses crushing revenues. If Pfizer can't make up from Lipitor's revenue decline, this company's future could leave investors wishing 2012 had stuck around a while longer.

Pfizer's rival and fellow Dow pharmaceutical member Merck faces patent expirations and other challenges of its own. Will Merck crumble under its own weight, or will it continue to pay dividends to investors for another century? To find out if this pharma giant has the stamina to keep its Bunsen burners alight, grab your copy of our brand new premium research report today. Our senior biotech analyst, Brian Orelli, Ph.D., walks you through both the opportunities and threats facing Merck, and the report comes with a full 12 months of updates. Claim your copy now by clicking here.

The article Pfizer's Strong 2012 Leaves the Future in Doubt originally appeared on Fool.com.

Dan Carroll has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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