With its dispatch of 10,000 jobs and a handful of research and manufacturing operations, troubled pharmaceutical giant Pfizer ended months of speculation Jan. 22 about how it aims to return to Wall Street's good graces. The move signals an attempt by the sprawling organization to adjust to an era where it's far more difficult to rely on blockbuster drugs to do the financial heavy lifting.
The cuts, which include more than 2,000 sales staff reductions announced last year, are expected to shave as much as $2 billion in annual costs from the company's books and amount to about 10% of Pfizer's global work force. Beyond reducing its labor force, Pfizer also plans to close manufacturing plants in Nebraska and New York, and three research centers in Michigan. The company also may close research operations in Japan and France, and sell a plant in Germany. Pfizer says it will divide U.S. pharmaceutical operations into four separate units, a way to promote entrepreneurship and accountability.
At a press conference Monday, Chief Executive Jeffrey Kindler deflected questions about Pfizer's recent unsteady performance and said investors ought to focus on changes since July, when he was promoted from general counsel. "We have a new leadership team. We're demonstrating a sense of urgency," Kindler said. "We're creating an organization with fewer layers, greater spans of control, more autonomous units. We're focused on pushing decisions down through the organization where they belong."
Pfizer is right to seek to become more "nimble," says Hussain Mooraj, an analyst with business-process and tech firm AMR Research. Among other deficiencies, he says, Pfizer has been notable in the past for having its manufacturing "spread all over the place without any focus on inefficiencies." The question is whether the transition to a more cohesive system can be achieved, while the organization weathers the upheaval of major job cuts. "It's a huge task ahead," Mooraj says. "How do you downsize by 10,000 of your work force and keep a leading-edge organization chugging in the right direction?"
Leaky pipe
For New York-based Pfizer, the restructuring marks an effort to impose change after a year that saw its multibillion-dollar antidepressant Zoloft go off patent. And its stagnant stock price contributed to the early departure of CEO Henry "Hank" McKinnell.
Analysts are also troubled by Pfizer's thin late-stage pipeline — a problem it shares with other Big Pharma players. In December, Pfizer halted a late-stage clinical trial of the experimental cholesterol drug Torcetrapib after more patients died in a group taking the drug in combination with Pfizer's $12 billion heart drug Lipitor than in a group taking only Lipitor.
The world's top-selling drug, Lipitor accounted for almost a quarter of Pfizer's 2005 revenue. With its patent due to expire in 2011, Torcetrapib was supposed to assume Lipitor's yoke as the company's revenue workhorse. Without that new drug, it will be "virtually impossible" for Pfizer to immediately replace sales lost to generic versions of Lipitor, says Morningstar analyst Heather Brilliant.
Skeptical response
The efforts to streamline Pfizer's massive R&D operation were also expected. Before the announcement, Deutsche Bank analyst Barbara Ryan had said "Look at the budget—$7 billion—it's hard to imagine they can't find ways to save money." Facing the same struggles as its peers, Ryan says Pfizer could move clinical trials to Eastern Europe or outsource data management from those trials to India or China. She notes, though, that trimming costs won't create growth.
Concerns about the sources of future revenue are reflected in the stock price, which has underperformed the Amex Pharmaceutical index in recent years. (It has outperformed the index over the past six months, though, bolstering Kindler's case that a turnaround is in progress). Ryan says the current stock valuation "reflects tremendous uncertainty. Pfizer trades like a bond—there has been a 4.3% yield based on the dividend. The market is highly skeptical about their ability to do this."
That skepticism persisted on Monday, after Pfizer said in its quarterly income report that it expects revenues to remain flat through 2008, while registering only modest gains in earnings per share. Wall Street seemed nonplussed. After the announcement, Pfizer shares slipped 1%, to close at $26.95 on the New York Stock Exchange Jan. 22.
Pfizer announced the cuts hours after the company said net profit for the fourth quarter was markedly higher than for the same period in 2005, owing to the sale of its consumer health care business to Johnson & Johnson. Sales for the quarter were flat, compared with the previous year, at a touch above $12.5 billion.
Pfizer has the industry's largest R&D operations, but they haven't been the most productive. Only three of the company's top 10 sellers were developed in-house. And drug development is an inherently risky process, meaning that not even Pfizer's billions can guarantee new drug hits.
Kindler told analysts on Jan. 2 that the company also needs to branch out from its current business model, which relies on a few blockbuster drugs to generate the bulk of revenue. "Among other things, that means we need to be as effective at selling a large number of $500 million drugs as we are at selling drugs with multibillion-dollar sales."
Goodbye blockbusters?
The simple fact remains that the world's largest drugmaker would require a raft of $500 million drugs to register on its bottom line. Pfizer has about 150 drugs in development, but Morningstar analyst Brilliant says the pipeline is weaker at the late stage, where Pfizer needs to produce blockbusters to replace Lipitor and other therapies scheduled to lose their patents. "Any drug that is not going to well exceed $1 billion [in annual sales] is not going to move the needle for them," Brilliant said last week.
Mooraj, of AMR, says deemphasizing mega drugs is just a reflection of reality. Amid huge pressure from generics companies, the blockbuster model, where a company enjoys protected market share for 8 to 10 years, is "going be squeezed in the future," he adds.
Pfizer says it aims to increase investment in areas like vaccines and antibodies which it believes will deliver better returns. The company says it will also keep scouting attractive products developed outside its own research program.
Reality or rhetoric?
With pharmaceuticals in the midst of a merger boom, Brilliant expects Pfizer to focus on acquisitions to synch with its army of salespeople. That means look for a new focus on widely used drugs geared toward common maladie s— think Viagra or the smoking-cessation drug Chantix, which was approved last year. However, last year's approval of cancer drug Sutent and the company's formidable oncology pipeline demonstrates an interest in more specialized areas.
Even considering these promising signs, the company faces enormous obstacles in the near term. After all, history is full of companies that have made similar promises that amounted to little more than rhetoric. Kindler fully understands that the Street might be skeptical. As he told analysts Monday, "When attempting significant change, many companies fail to fully commit to the effort — and often lose their way."