Tuesday, September 30, 2008

Pfizer to Tin Man: Drop Dead

You're axing what?

Pfizer is, according to today's Wall Street Journal (not to mention at least one astute blogger last week), giving up on R&D in heart disease, obesity and bone health.

The big news here is the abandoning of cardiovascular medicine--Pfizer's profit center driven by $17+ billion annual revenues from Lipitor and Norvasc--but of course there are exceptions to consider. Pfizer isn't dropping its late-stage programs, like the much-written about apixaban, for example.

But the strategic shift, not wholly unexpected and certainly not conflicting with statements made by Pfizer leadership lately (including comments by R&D chief Martin Mackay and head of strategy Bill Ringo at FDC/Windhover's Pharmaceutical Strategic Alliances meeting last week) says a lot about where Pfizer--and Big Pharma generally--is moving.

Where's that? Toward a greater emphasis on specialty therapeutic spaces like oncology (look for a feature on Pfizer's oncology ambitions in the next IN VIVO) and into large molecules like next-generation biologics, of course. By now this is not a surprise, but just how Big Pharma manages to transform itself while at the same time dealing with massive patent expirations and the demands of dividend- and buyback-hungry shareholders remains to be seen. Nevertheless, pulling out of the increasingly genericized cardiovascular space and some other primary care areas should speed this transition.

Some of the smaller top-tier companies, like Bristol-Myers Squibb, can make do with focused business development strategies--the acquisition of Adnexus, for example, or the please-let-it-be-over-soon-we're-so-sick-of-it Imclone takeover. For Pfizer such add-ons won't do the trick. But Bill Ringo noted at PSA that although Pfizer on the whole would have trouble moving the growth needle with a string-of-pearls strategy akin to BMS's, it could do so within the context of specific disease areas. Cardiovascular R&D is clearly not one of those areas.

Layoffs are likely (as of now still no official word from Pfizer on the cuts). But look also for more Pfizer spin-outs like the Japanese business RaQualia and the second incarnation of Esperion, as well as out-licensing deals, to help smooth the transition. Pfizer has, by its own estimates, too substantial a Phase II pipeline to take through to pivotal trials. "We need to be more creative with development," noted Mackay at PSA, and he said RaQualia was a good example of that creativity at work, as was the apixaban deal, which could be replicated in the other direction with Pfizer partnering on one of its own Phase III candidates. What should be worrying to Pfizer and other pharmas is that despite a Phase II glut these companies have a difficult time determining which post-proof-of-concept projects will succeed in Phase III and at the regulators.

Pfizer isn't the first pharma to abandon what most would consider its core therapeutic space. GSK and AstraZeneca, for example, sustained for years by the profits from GI franchises, each exited the bulk of their R&D in that area (witness AZ's spin-out of Albireo, though that pharma has noted it remains active in GERD research whereas Pfizer seems unlikely to continue in hypercholesterolemia R&D).

So where does the Tin Man turn when his new ticker gets rusty? And where do those small pharma and biotech companies in need of a partner for their next-big-thing HDL raiser or anti-hypertensive turn? In this up-is-down, black-is-white pharma shift to specialist drugs, perhaps primary care becomes the domain of a few specialists while the rest of the industry piles into oncology and orphan drugs.

One further irony: even as its exits cardiovascular research, Pfizer wants to remain one of those few remaining primary-care specialists. Bill Ringo noted exactly that at the PSA and in this article in IN VIVO -- as other Big Pharmas cut back primary-care commercial programs to boost their presence in specialist marketing, Pfizer, while certainly doing the specialist thing, is going to keep its primary-care capabilities, theoretically giving itself a comparative advantage as an in-licenser when it comes to those increasingly rare, and expensive, late-stage primary care candidates.

1 comment:

Anonymous said...

Give it a year or two and you will have a Carl Icahn (or even Dan Vasella via a hostile bid) to take Pfizer and its board out of misery. And this is not because of the recent decision to exit CV – that arguably is the right decision. Rather it is due to a fundamental failure in multiple areas of good corporate stewardship by Pfizer’s board – first with their toleration of Hank McKinnell’s tenure and then with their pick of Jeff Kindler. McKinnell’s screw ups are well documented, so let me focus on what Kindler’s to date performance has been like.

First, the board was correct in recognizing that they needed a radical change of direction following McKinnell and so they were right in not picking Shedlarz or Katen – that would have been akin to a ‘third Bush term’. But the board seriously erred in picking Corporate Counsel and former fast food executive Jeff Kindler. Kindler was probably a great Corporate Counsel and probably would have made a good VP of HR or Communication or Govt. Relations – but he is no CEO. Just as a comparison, see what Kindler has accomplished in over three years to what some of the other new big pharma CEOs have done in much shorter time frames – Jim Cornelius (BMS), Andrew Witty (GSK), Severin Schwan (Roche) and even John Lechleiter (LLY) with his new Imclone move. Compared to these folks, it is clear that there is a lack imagination, when it comes to Jeff Kindler.

To be sure, Kindler has done some positive things – focused research investments, streamlined manufacturing, laid off people and tried to make Pfizer more in the mold of GE via things like laying off the bottom x% each year and via six sigma initiatives etc. A couple of moves have been really gutsy like his decision to kill Exubera. But in the end, these are all reactive, defensive moves. Any semi-competent executive knows that Pfizer needs to cut costs. By not playing offense at all, Kindler has highlighted his lack of skills and expertise in corporate strategy and finance – two essential skills for any CEO. This has been remedied to some extent in recent months by hiring Frank D’Amelio as CFO and Bill Ringo as SVP of Strategy - but a CEO still needs enough gravitas in these areas to provide effective oversight and make the tough calls.

Pfizer has many long-term problems and Kindler has tried to address them by driving accountability via structures like business units with their own P&L responsibility. However Pfizer’s most pressing problem is the lack of any products to sell and here Kindler has done precious little. This is like trying to fix the leaky plumbing, unsightly landscaping and peeling paint on a house, while there is a fire raging in one of the rooms. Kindler and Pfizer’s board sat on one of Pfizer’s biggest assets - its $26 billion hoard of cash. Instead of deploying this asset toward earning a high RoI, Pfizer have opted to make it like a treasury bill via a dividend payout. Lack of products to sell also mean that some of Pfizer’s other assets (and comparative advantages), like its field force and marketing organizations are grossly underutilized.

Don’t get me wrong – I am not advocating another huge value destroying transaction like Pfizer-Pharmacia. Those types of transactions are quite risky given prevailing valuations and the integration challenges. Still, if Pfizer were to look carefully, I’m sure there are several mid-sized deals that can move the needle way more than the puny deals Pfizer have done so far. Besides Lilly with Imclone, look at some of the other mid-sized deals – Novartis buying Alcon, GSK entering the branded generics arena with Aspen, Abbott’s acquisition of Kos. One could convincingly argue that Pfizer could do more via mid-size deals and alliances.

Besides not playing offense, I feel that even some of Kindler’s defensive moves are flawed. Pfizer is not making light bulbs or aircraft engines. So everything that works for GE will not work for Pfizer. Laying the bottom x% every year does not fit functions like drug development which take many years. It may be better to lay off the bottom x% every 5 years. Andrew Witty knows the serendipitous nature of drug discovery and was quickly able to come up with a VC based funding model that has worked in other areas like biotech and IT. Despite some positive moves like venturing into biotech with Corey Goodman, Kindler seems lost when it comes to fixing Pfizer’s small molecule R&D.

It is time for Pfizer’s board to replace Kindler now – may be even Bill Ringo would make a better CEO. If Pfizer’s plan is to shrink and be smaller ex-Lipitor, the board will see a Carl Icahn or Dan Vasella or even a KKR at their doorstep by 2011.