Pfizer to Cut Research, Shut Plants in Savings Effort

Ian Read, the new chief executive officer of Pfizer Inc., plans to lower costs by closing labs and reducing research spending by as much as $3 billion as the company faces declining sales of its best-selling drug.

“We have to fix our innovative core, and that’s what this R&D change is about,” Read told reporters at Pfizer headquarters in New York today. The reductions are part of a plan to overhaul the company’s research operation to focus on the most-profitable programs, Read said.

Research and development spending will be $6.5 billion to $7 billion in 2012, the CEO said. That compares with $9.4 billion in 2010 and is $1.5 billion lower than previous Pfizer forecasts. Pfizer plans to buy back $5 billion in shares next year as part of a $9 billion repurchase program, he said.

Today was the first earnings report under Read, who succeeded Jeffrey Kindler in December. Pfizer is counting on products from the $68 billion Wyeth acquisition in 2009 to replace sales lost to generic copies of the cholesterol pill Lipitor, the world’s best-selling drug. Read said Wyeth drugs won’t be enough to make up for that shortfall, and the company must rein in its unproductive spending.

No Pennant

“It’s like being the New York Yankees and having a huge bankroll and never being able to win the pennant,” said Tony Butler, an analyst at Barclays Capital in New York, referring to the Major League Baseball team. “This is saying: ‘I’ll take the Cleveland Indian budget and see what we can do with that.’ Spending more doesn’t mean getting anything out.”

“This is all good,” Butler said.

Pfizer rose $1, or 5.5 percent, to $19.22 at 4 p.m. in New York Stock Exchange composite trading of 133 million shares, more than triple the three-month average. It was Pfizer’s biggest gain in six months, helping the Dow Jones Industrial Average to its first close above 12,000 since June 2008. Pfizer shares have climbed 2.3 percent in the past 12 months.

The company plans to halt funding research in the areas of allergy, urology, respiratory, internal medicine and tissue repair, Read said. Pfizer will focus on the more-profitable areas of cancer, neuroscience, inflammation, vaccines and immunology, he said.

“At some point your shareholders and stakeholders demand you have a return on investment in research,” Read said. “We’re looking at areas where we think it’s not a competitive advantage.”

More Accountability

Source: Pfizer Inc. via Bloomberg

This is the first earnings reported by Chief Executive Officer Ian Read, seen here, who replaced Jeffrey Kindler in December. Close

This is the first earnings reported by Chief Executive Officer Ian Read, seen here, who... Read More

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Source: Pfizer Inc. via Bloomberg

This is the first earnings reported by Chief Executive Officer Ian Read, seen here, who replaced Jeffrey Kindler in December.

To improve productivity, Pfizer will demand more accountability of its business managers and scientists for the commercial success of experimental drugs, which can cost $1 billion each to develop, Read said. If the research team finds a compound that shows promise, and if the business team chooses not to pursue it, the company will push to sell the rights to other companies.

Read said Pfizer will increasingly outsource business. The company will close its research hub in the U.K. seacoast town of Sandwich, England, where Pfizer developed five of its 20 top drugs, including Viagra, before the purchase of Wyeth. Pfizer will also shift resources to its facilities in Cambridge, Massachusetts, from Groton, Connecticut.

The company estimated it will record $2.2 billion to $2.9 billion in costs to complete the research changes. The jobs in Sandwich won’t be moved elsewhere, Read said. Instead, most of the research will be halted and some will be contracted to other companies.

Needs to Shrink

“Pfizer’s future is to shrink in order to maintain profits and pull money from R&D and use it for share buybacks to keep investors happy for another quarter or two,” said Erik Gordon, a professor at the University of Michigan Ross School of Business, in Ann Arbor, who studies drug development. The company will pursue “the occasional expensive acquisition to keep the company afloat,” he said in an e-mail.

Pfizer’s $3.6 billion deal to buy King Pharmaceuticals Inc. received regulatory approval last week, and the company yesterday said it expects to complete the purchase this month. The acquisition expands Pfizer’s painkillers and experimental pain medicines that are less addictive than available drugs.

Patent exclusivity for Lipitor ended in Canada and Spain last year and will expire in the U.S. in November. Sales of Lipitor declined 17 percent in the fourth quarter to $2.63 billion, Pfizer reported today.

Sales will fall by more than half in 2012 after generic- drug makers flood the U.S. market with cheaper copies, Barclay’s Butler said in a telephone interview. He has a “positive” rating on Pfizer with a price target of $21, according to data compiled by Bloomberg.

Cost-Reduction Plan

Pfizer is continuing a cost-reduction plan that includes firing 19,000 employees, closing 8 plants and shutting 6 research centers. Even before that plan was enacted, Pfizer eliminated about 40,000 jobs during the 6 years ended in 2009.

Pfizer today reported that fourth-quarter net income rose to $2.89 billion, or 36 cents a share, from $767 million, or 10 cents, a year earlier, Pfizer said. Revenue rose 6.2 percent to $17.6 billion.

The company said 2011 profit will be $2.15 to $2.26 a share, falling short of the $2.30 average estimate of 20 analysts surveyed by Bloomberg.

To contact the reporter on this story: Tom Randall in New York at trandall6@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net.

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