Pfizer IPO, Cost Cuts Yield Time to Reinvent Its Research
Pfizer Inc. (PFE), the world’s largest drugmaker, put in place the last piece of its plan to refocus the company on developing new drugs, announcing it would start the separation of its animal-health business this month.
As the drugmaker spins off the unit and makes deep spending cuts, Chief Executive Officer Ian Read has set the stage for Pfizer’s future without Lipitor, the drug that dominated the company’s sales until this year after losing market exclusivity. Top on the agenda is making New York-based Pfizer better at turning out innovative new medicines, he said.
The company has three drugs with the potential to generate over a $1 billion each in sales that could reach the market next year, including treatments for heart disease, Alzheimer’s and rheumatoid arthritis. Eliquis, a blood thinner, could be approved in the first half of 2013.
“On the research side, we’re before the middle innings, because it takes a longer timeline,” than cutting expenses, Read said yesterday in an interview. “We need to make it easier for people to make an impact and get things done inside a company that has 100,000 colleagues.”
Pfizer yesterday said it would start an initial public offering in mid-August to sell as much as 20 percent of its animal-health unit.
It also reported second-quarter net income that rose 25 percent to $3.25 billion, or 43 cents a share, and adjusted earnings per share that topped analyst estimates by 8 cents, largely due to aggressive cuts that knocked out $8.27 billion in adjusted expenses. Revenue sank 9 percent to $15.1 billion in the quarter led by declining sales of Lipitor, which dropped 53 percent to $1.22 billion.
The company continues to generate enough cash, and has fat to trim, Read said. As part of its spending overhaul, Pfizer may cut as many as 10 more facilities in the next several years, Chief Financial Officer Frank D’Amelio said.
“Read showed he is serious about cost cutting, and investors already rewarded him with a nice run-up in the stock price over the last 12 months,” Erik Gordon, a professor of business at the University of Michigan in Ann Arbor, said yesterday in an e-mail. “The new products have to pan out and Pfizer has to grow its non-U.S. sales in the face of a global slowdown. Both are riskier propositions.”
Read and D’Amelio also have been able to keep earnings per share up through stock buybacks. The company bought back $9 billion in shares last year and will buy back $5 billion this year, D’Amelio said.
“Pfizer can keep investors interested by dividends and using cash to buy back stock,” said Tony Butler, an analyst with Barclays Plc. As for the research and development effort, it “takes some time for those changes to bear fruit.”
There have been setbacks.
Yesterday, the company said that U.S. regulators may delay approval of tofacitinib, a treatment for rheumatoid arthritis, beyond its current August deadline.
At the same time, Pfizer released a study showing the drug was more effective than methotrexate, an older treatment. Tofacitinib was superior in easing pain and swelling of joints caused by rheumatoid arthritis and no new side effects were found, according to the study. Results were from the last of three stages of human tests generally required for Food and Drug Administration approval. The drug may compete with Abbott Laboratories (ABT)’ top-seller, Humira.
Bapineuzumab, an Alzheimer’s disease drug being developed with Johnson & Johnson (JNJ) and Elan Corp., failed the first of four pivotal, final-stage clinical trials, Pfizer said on July 24. Results from the next trial will be released this month, Read said.
The company also is seeking marketing clearance for Eliquis, a blood thinner being developed with New York-based Bristol-Myers Squibb Co. (BMY) The FDA rejected Eliquis in June, asking the companies for more information from existing trials.
The FDA could take as long as six months after the companies give regulators the data to respond. The agency hasn’t asked for a new clinical trial. The drug, aimed at patients with heart arrhythmia, would have $2.5 billion a year in sales by 2015 if approved, according to Tim Anderson, a Sanford C. Bernstein & Co. analyst in New York.
Read said he’s committed to sticking with his strategy of getting Pfizer’s innovation engines working even if there are near-term setbacks, and won’t turn to buying drugs or companies just to fill the pipeline.
“We invest internally in projects that we believe have a return above our cost of capital,” Read said. “External opportunities are subject to the same analysis. We are not going to do projects that do not return our cost of capital because of issues internally or non-issues internally. Our willingness to do deals externally is driven by the value of the deals.”
The company has bid for other companies, including drugmaker Amylin Pharmaceuticals Inc., Bloomberg has reported. However, it hasn’t announced a purchase worth more than $50 million during Read’s tenure, according to data compiled by Bloomberg.
The company has cash coming that will give it more room to breathe, from the divestiture of the two noncore units. April, Pfizer agreed to sell its infant nutrition business to Vevey, Switzerland-based Nestle SA for $11.9 billion.
Along with the IPO of the animal-health business, Pfizer plans to give current shareholders stock in the company, to be named Zoetis, Read has said previously. That will further reduce Pfizer’s amount of outstanding stock and increase earnings per share.
The drugmaker plans to sell shares of the animal-health business in the first half of next year, Read said. The company will file a registration statement with the Securities and Exchange Commission that will start the process of separating the business this month.
Pfizer hasn’t announced yet where the animal health company will have its headquarters, nor said who will lead it.
Money from the divestitures is likely be to be used for share buybacks, which Read calls “the case to beat,” compared with acquisitions.
Butler, of Barclays, thinks Pfizer and the rest of the pharmaceutical sector are entering a period with more research and development promise than any time in a decade.
“They’re managing these businesses much better than they did at the turn of the decade and the mid-90s,” he said. “They are growth stocks. Not at the level they once were. But perhaps at a more sustainable level than they had been.”
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