Pfizer’s (NYSE:PFE) recent deal with AstraZeneca to market an over-the-counter (OTC) version of the latter’s blockbuster drug Nexium, has gotten alot of media attention lately. This has left many surprised, who were expecting the consumer healthcare division to get similar treatment as its nutrition and animal health business. The company has been increasing its focus on its core pharmaceutical business. The rationale is that pharmaceuticals offer better profit margins and leave more cash to invest in research and development.

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Of late, Pfizer has been grappling with the issue of patent cliffs and may continue see its sales declining. Lipitor, which generated close to $10 billion in 2011, is losing market share at an accelerating pace and sales have nearly halved in a relatively short time frame. The looming patent expiration for Viagra, Enbrel, Detrol, among others, in 2012 will also hurt revenues. This will leave the company looking for alternative sources of revenues to fend off losses, as there seems to be no near term reprise from its current pipeline.

Pfizer has explored M&A options and emerging markets expansion for revenue growth. In addition, the company has undertaken several cost cutting measures which include reducing R&D expenditures to boost earnings. The OTC market seems to be an easy option that could help support earnings. The U.S. FDA recently hinted that many more prescription drugs including Pfizer’s Lipitor could be made available as OTC drugs for the treatment of chronic conditions, which could trigger growth in the OTC market. With its wide sales network, Pfizer could position itself to tap this expected growth.

In the next few years, many blockbuster drugs will be going off-patent, which has led pharmaceutical giants such as Pfizer to realign their strategies in order to fend-off potential future revenue losses. The deal raises a pertinent question if a change in trend / strategy is in order for pharmaceutical giants and if more companies will follow Pfizer’s footsteps.

We believe that Pfizer is just trying to hedge its bet on its core pharmaceutical business rather than seeing a bigger opportunity in the OTC market. We don’t think there is a new paradigm for OTC Switches as many have argued. Coming up with a successful drug require a lot of time and patience. While it will certainly help the company generate revenues from off-patent drugs, it won’t be able to offset losses from patents expiry. Furthermore, margins could be much lower in the OTC market. We believe the only way forward is for Pfizer to focus on its pharmaceutical pipeline, which has several promising drugs.

We currently have a $25 price estimate  for Pfizer, which is 5% above the current market price. We are in the process of revising our price estimate to reflect recent developments and earnings. In our model, the consumer healthcare business is part of Pfizer’s Diversified Legacy Drugs & Alliances division which, according to the Trefis estimate, currently accounts for nearly 32% of the company’s value.