Pfizer Chief Executive Officer Jeff Kindler seems to want it both ways. He wants Pfizer (PFE) to remain the largest drug maker in the world, but he also wants a leaner, meaner company.
While the two goals may seem at odds, Kindler has been feverishly pushing his company in both directions.
Pfizer’s recent third-quarter results suggest there may be a method to Kindler’s ostensible madness. Just days after announcing that its $68 billion merger with Wyeth was completed, Pfizer reported a 26% increase in profits for the period, a gain attributed primarily to cost cutting measures, most of them in the form of job cuts.
So, while the company was growing on the one hand, it was getting smaller on the other, and profiting all the while.
Consider that Pfizer has said it plans to shed nearly 20,000 jobs as it integrates Wyeth and cuts other costs by eliminating redundancies. The drug maker has already eliminated more than 5,400 positions this year, and since the acquisition closed on Oct. 15, Pfizer has announced that it will shutter three Wyeth sites in Pennsylvania and one in New Jersey. Cuts to Pfizer’s research units are also expected before the end of the year.
Kindler addressed the seemingly divergent goals in a conference call with analysts last week.
“I have said from the beginning that our approach here is to combine the power of scale with the spirit of [small]. We are not interested in size just for the sake of size. In fact, a lot of what we are doing … is actually creating smaller organizational units where small is powerful,” he said.
Kindler said an important aspect of the new approach has been, much more than in the past, a demand for more accountability from managers farther down the Pfizer food chain. The shift has resulted in “faster decision-making, improved productivity, more efficient and effective use of our owners’ capital, and better opportunities to create shareholder value.”
Meanwhile, the Wyeth acquisition “significantly strengthens our people, our pipeline, our assets and our capabilities, and as a result our ability to seize the powerful opportunities ahead of us. I have never felt better about Pfizer’s future,” he said.
Kindler went on to explain that some areas of Pfizer, such as late-stage clinical development and growth in emerging markets, will benefit from the company’s mammoth reach. But other areas are hurt by it, notably research, where Pfizer hopes to instill an “entrepreneurial agile spirit,” he said.
“So we’re trying to strike that balance between the two and I think we’re making tremendous progress,” the CEO concluded.
But can it work long-term given the dramatically shifting landscape facing the pharmaceutical industry, especially the handful of companies often referred to as "big pharma?"
Pfizer and the others -- Merck (MRK), Sanofi-Aventis (SNY), Novartis (NVS), Johnson & Johnson (JNJ), et al., -- haven’t produced a legitimate blockbuster drug comparable to a Lipitor (Pfizer’s $12 billion-a-year cholesterol fighter) in years. And the patents on many of their existing blockbusters, including Lipitor, are set to expire in the next few years. That means all of these products will face tough competition from much cheaper generic products, and the companies who make the brand name versions will lose billions in profits.
IMS Health, the pharmaceutical industry research firm, has reported that in the next five years brand name drugs with annual revenues totaling $137 billion will lose their patent exclusivity and face generic competition.
At the same time, debacles such as the 2004 recall of Merck’s Vioxx painkiller after it was shown to be potentially dangerous to users with heart conditions has made the review and approval process for new drugs more time consuming and consequently more expensive than ever.
And none of this even begins to take into account the uncertainty raised by the proposed health care reform legislation making its way through Congress.
All of this raises questions over whether Kindler’s dual strategy is viable.
Analysts have said recent giant drug mergers, including the Pfizer and Wyeth combination, as well as Merck’s $41 billion purchase of Schering-Plough, amount to little more than Hail Mary attempts to maintain huge profits by acquiring other companies’ blockbusters in lieu of developing their own new ones.
“The old model is dead, and big pharma is struggling to come to terms with what new model is going to work. What is clear is that scale is not going to do it,” John Kimberly, a management professor at the Wharton School, said recently.
Kindler evidently feels differently, and that’s not surprising. Rare is the CEO of a long-time Fortune 500 firm who’s willing to admit that the future is smaller. For large publicly traded companies, it has always been -- and always will be -- about growth.
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