Michael Shulman's Sell Short

Pfizer was, at one time, the most owned stock in the world and the darling of individual and institutional investors. Despite looming patent expirations, an anemic pipeline and a stock that has significantly underperformed the S+P for the past five years, analysts and legions of blow-dried pundits on CNBC keep recommending the stock. In my service, ChangeWave Shorts, I have recommended short and long term puts on the stock - I myself am not short Pfizer.

Disclosure over, last week was not a good week for PFE in light of obvious and not so obvious news. It went oh for there in cancer trials - an experimental lung-cancer drug called figitumumab failed in trial as did Sutent, already on the market for two type of cancer treatment, in trials for advanced breast-cancer drug Sutent failed to meet their primary endpoints. The Street read the headlines and the stock sold off a bit.

There was other news from halfway around the world (India) and a few blocks from my home (the FDA) - Ranbaxy, an Indian generics and drug maker, got smacked by the FDA for faulty manufacturing processes - and not for the first time. Generics laws state the company "first to file" with the FDA gets a six month exclusive, enabling the generics manufacturer to charge near brand market prices and garner excess profits for two quarters. A while back Ranbaxy had this right with the blockbuster migraine drug Imitrex - and failed to get FDA clearance of its manufacturing. Last week the same happened for a generic version of Flomax, the anti-incontinence drug that you see in ads while you are eating dinner.

What does this have to do with Pfizer? Either good news or bad news. Or no news - but as an investor, it is a thread of news that bears watching.

This could be good news for Pfizer -- in 20008 Pfizer cut a deal with Ranbaxy to delay its generic form of Lipitor as part of the settlement of patent litigation - Ranbaxy has first to file rights for generic Lipitor, known as Atorvastatin. In return for the settlement of patent violations Ranbaxy agreed to delay selling Lipitor in the US until November of 2011. If it cannot make the pills, it cannot sell the pills and PFE gets to keep 100% market share at very high prices for another six months - potentially $4 billion or more in revenue. What are the odds Ranbaxy has problems making Atorvastatin? Time released medications such as Lipitor are quite hard to manufacture - just ask Teva (TEVA) or Schering Plough, they have turned to a smallish company with great manufacturing expertise, Impax Labs (IPXL), to help them out in this area. It is very possible Ranbaxy could blow it again.

It could also be bad news if Ranbaxy problems encourage other generic makers to go to the FDA and challenge the first to file status for Atorvastatin or take a different view of Lipitor patents and claim generics should come to market in November of this year. There is some legal reasoning behind this and the lead dog in this fight - if it occurred - is world generics leader Teva (TEVA). Chances are slim Teva would push patent litigation, and risk damages, by coming to market in April of 2011 - six months after some think Lipitor patents expire. But it could happen - and that would take 80% of a full year of revenue (and the profits) away from Pfizer.

Right now the market has priced in full generic competition for Lipitor in April of 2012. Investors need to be aware the stock will get whacked if any probability of this date moving forward is built into Street expectations.

Disclosure: The author takes Lipitor.

You cannot short a political party, can you? Yes, you can - for Republican failure in November, something I see as increasingly likely, means more stability on Washington, less rancor, and that is good for equity markets.

Health care reform passed last night. As happened in 1995, when Democratic Senate leader Tom Daschle maneuvered Newt Gingrich into shutting down the government, and instantly ruining the republican election gains of 1994, Nancy Pelosi took John Boehner and Eric Cantor to the proverbial clinic. Using her power as Speaker, power as leader of House Democrats and superb Parliamentary maneuvering she defeated a bunch of Republicans smug from their victory in Massachusetts and, as usual, spending more time on rhetoric than trying to get anything done. This was not clear until last night's vote, a vote that demonstrated yes, Barack Obama is a real political leader and if you want a speech, hire a man, if you want to get something done, hire a woman (I stile this from David Gergen of CNN.)

Last night the Republicans showed they really area minority party - and two days before, they showed they are willing to slum with street trash as they urged on demonstrators who knew little of history or the details of the health care. Spurred on by Congressional Republicans standing on the Capitol balcony, they spat on a member of the House, called John Lewis, one of the great political and civil rights leaders of the last century a nigger and then called, by everyone's estimation and a yearly poll the smartest man on Capitol Hill, Barney Frank, a faggot. Oh, they also managed to call Nancy Pelosi a bitch as she outmaneuvered pretty boys Boehner and Cantor.

And this is how the Republicans will be remembered by millions of conservative Democrats and independents in November. I know many people who would love to vote Republican but refuse to align themselves with a party that is eager to include racists, homophobes and street trash as part of their constituencies. This same middle group remembers, and will be asked by Democrats to remember, that Republicans in good times, doubled the national debt, fought a war without putting it in the budget and when the nation declared war on Al Qaeda after 9/11, the cheerleader in chief did not ask for collective sacrifice but asked people to go shopping. Bottom line - the expected pick up of House and Senate seats is way too optimistic and election results will disappoint many.

And this all matters. Conventional thinking has any Republican win in November as good for the market - and that is wrong. Right now, with two wars still underway, China getting cranky, Greece in deep yogurt, the economy a wreck and real world unemployment growing, stability counts more than hollow ideology - and any Republican gains will not include the Senate and will not include Obama going off to place for the Lakers. A weak Republican showing will actually benefit the market - and based on what I saw last night, that weak showing is well underway.