Tuesday, March 15, 2011

What Lipitor? Pfizer's Strategic Shrinking Solution

Investor pressure on Pfizer to downsize radically has been rising for several months, controversial as it is, but Sanford Bernstein analyst Tim Anderson's jarring note on Monday underscored how serious Pfizer's new CEO Ian Read is about shaking up the ship.

"If we hadn't been there ourselves to hear it firsthand, we would not have believed it, but it seems from our recent meeting with CEO Ian Read that Pfizer may be destined for a significant shake up in the form of shrinking its behemoth ~$67 billion yr. revenue base," Anderson wrote. "No final decisions have yet been made, but all options appear to be on the table and through a series of major potential moves the "new" Pfizer might end up with annual sales of ~$35 to $45 billion/yr, something Read terms the 'innovative core…'"

The timing of such talk is hardly coincidental. Read was appointed CEO Dec. 5, almost exactly a year to the date from when Pfizer's leading drug Lipitor goes generic. What better way to deflect attention from that cataclysmic event than to rip up a company that just underwent a two-year reorg?

True, Lipitor may not face the worst kind of blood bath encountered by many small molecules once they go off patent, given various global six month exclusivities and extensions and Pfizer's own mapped plan for bolstering its sales in emerging markets. But analysts are projecting that the brand will lose at least 80% of its $5 billion in U.S. sales within a year.

And, if Pfizer spins out its $10 billion Established Products Business Unit – one of the plans under consideration -- even the 20% remaining revenues may no longer belong to it but to the new entity, in whatever shape that entails. Other moves in play include spinning out non-core consumer health, nutritional and/ or animal health businesses, which together make up about 15% of the company's total sales.

Underlying the yakking is a lingering disappointment in Pfizer's 2009 acquisition of Wyeth for $68 billion, as the company clearly has struggled to meet financial targets it set when it first announced the deal. A series of late-stage R&D failures also hurt. And there's the observation that even if the pipeline pans out, in an era of targeted therapy no one drug can move Pfizer's swollen needle. The stock therefore has barely budged, even as management cut spending, closed manufacturing sites, and shaved the once-generous dividend to help pay for the Wyeth acquisition.

Given all the challenges Pharma faces, the fierce discussion underway about right-sizing pharma is appropriate. But until now, deliberately downsizing an industry leader by taking $25 billion in sales off the table wasn't considered a viable option. Recall the debate that consumed Wall Street when Pfizer originally announced its Wyeth deal and Pfizer's then CEO Jeff Kindler's adamant argument that getting bigger was the best way forward.

In part, the sentiment underlying Pfizer's options – as Anderson points out -- could be the grass is greener in my neighbor's yard kind of wishful thinking, given how well the much smaller Bristol Myers Squibb has done as a focused company, which made a killing by spinning out its Mead Johnson nutritional subsidiary in early 2010. It could also be a response to investors looking for any sort of creative strategic idea to raise Big Pharma, and Pfizer in particular, from Wall Street's dumping ground.

Or, maybe it's all part of some brilliant rational plan. Two years ago, an unnamed source spoke to IN VIVO magazine about shrinking Pfizer: "But if Pfizer had wanted to do the spin-offs, they could have," one executive close to the transaction said. The tax problems with spin-offs, he believes, are no more challenging than those Pfizer is incurring by repatriating perhaps $8 billion in off-shore profits, which will likewise increase Pfizer's tax bill. In fact, this executive and others suspect that spinoffs will be in any event the longer term result of Pfizer's acquisition [of Wyeth]: after all, if Pfizer is serious about keeping its five business units managerially independent, each responsible for its own P&L, they'll also be larger and theoretically more sustainable–and thus better candidates for spin-offs."

No matter what course Pfizer takes, none of it gets the company off the hook for the need to improve its R&D. And there's no guarantee that shrinking will help that effort; while disciplined focus is helping Bristol on pharma innovation, it certainly isn't doing Lilly wonders (note the latter's recent efforts to bulk up its non-core animal health business, albeit on an entirely different scale than Pfizer's). But once again, the story will play well on Wall Street, which is waiting for some new ideas from pharma executives. -- By Wendy Diller

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