Did Pfizer Doctor Its Numbers?

William C. Steere Jr. is in a strange bind. As chief executive of Pfizer Inc., one of the nation's healthiest drug companies, he should want to flaunt his company's double-digit earnings prospects. And yet, as chairman of the drug industry's main Washington lobbying group, the Pharmaceutical Manufacturers Assn. (PMA), Steere has to convince skeptical legislators that drugmaker profits already are under pressure. President Clinton's health-care reform, he argues, could endanger the industry's future.

What to do? Some industry insiders claim that Steere is spending heavily and delaying sales to deliberately dampen Pfizer's profit growth rates. "The company did the politically prudent thing at the beginning of the debate over health-care reform," says PaineWebber Inc. drug analyst Ronald M. Nordmann. "They managed down the numbers."

CUT JOBS. Steere scoffs at the idea as "just not true." Pfizer, he insists, is feeling every bit of the cost-containment pain that the entire industry is feeling. After all, it has cut 1,000 jobs since 1992 and is planning to trim 3,000 more in the next three to five years, moves that cost it more than $750 million in charges to earnings last year.

But a closer look reveals that Pfizer not only is healthier than most of its peers but is faring better than its latest numbers suggest. Take its 19% slide in 1993 net income, to $657.5 million. Back out restructuring charges and divestitures, and Pfizer shows a net income from ongoing operations of $1.18 billion, a 15% rise--twice the increase of some major rivals.

There also is evidence that Pfizer pinched fourth-quarter sales while boosting expenses. Wholesalers say the company withheld all its medicines from them after mid-December, saying it wanted to prevent buyers from stocking up early in anticipation of a planned 2% rise in prices on Jan. 15.

The result: Wholesale customers couldn't get enough of such medicines as Procardia XL, the billion-dollar blockbuster used to treat angina and hypertension. It wound up logging an 11% decline in sales in the quarter. "We went to them and said, 'Hey, we're running short,' and we offered to let them look at our inventory and check us out," says a drug wholesaling executive. "But they were insistent that [we] just wanted to build up to take advantage of the price increase." A Pfizer spokesman says Pfizer simply has gotten better at "policing" against hoarding before price hikes.

MORE R&D. Whatever the reason, the effect was to tug down Pfizer's results. For the fourth quarter alone, sales growth for continuing operations fell to a paltry 2%, vs. 24% in the year-ago quarter. For the full year, growth from continuing operations amounted to just 9%, to $7.47 billion. Pfizer also boosted R&D spending more than rivals. These moves helped the company in two ways: Curbing the 1993 growth rate kept Pfizer at a level less likely to incur "greedy drugmaker" charges from lawmakers. And pushing more sales into early January will help prop up its results for 1994, when pressure from managed-care buyers hammering away for discounts is likely to build with each quarter.

If Pfizer did manage its earnings, though, it made a critical misstep: failing to warn Wall Street. Analysts had expected a 24% rise in earnings from continuing operations for 1993, and investors reacted badly to the reported 15% gain on Jan. 19. Pfizer's share price dropped $5, to just under $63. Since then, it has recovered only to 64 or so.

Managed or not, Pfizer's prospects are far from gloomy. Salomon Bros. analyst Mariola B. Haggar figures that the company's clutch of older drugs and its new-product stream guarantee earnings growth of 12.6% in 1994--not bad in a year of diminished expectations. How that plays in Washington may be ticklish, but it's a problem Bill Steere's drug-industry rivals can only envy.


Pfizer's chairman spoke with BUSINESS WEEK about his company's earnings and health-care reform:

Some analysts have suggested that you've deliberately managed your earnings down to look more "politically correct." How do you respond?

That's just not true. The earnings are the


The Clinton Administration has set up the drug industry as the whipping boy for health-care reform. Do you think that's fair?

No. I don't think that's fair. The pharmaceutical industry is an easy target because people buy their own drugs, whereas almost everything else in health care is reimbursed.

After raising prices fairly aggressively in the late 1980s, drugmakers have been restraining them in recent years. Is that for political reasons?

It's the inability to raise prices. There are certain public-policy elements to that, but the majority of our decisions on pricing have been market-based. And the marketplace is clearly


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