Pfizer's Savings Rx Is a Partial Cure
By Amy Barrett
Pfizer Chairman and CEO Henry A. McKinnell Jr. is taking an ax to the company's operations. On Apr. 5, the drugmaker announced a massive restructuring that would slash $4 billion from Pfizer's (PFE ) cost structure by 2008. That figure well exceeds the $2 billion in cost reductions that many on Wall Street had been expecting.
McKinnell has little choice but to take radical steps. From 2005 to 2007, generic competition will erode the revenues of Pfizer products now generating $14 billion in annual sales. At the same time, the company's $4.6 billion Cox 2 painkiller franchise, which includes the drugs Celebrex and Bextra, has been hard hit by concerns that those drugs may be linked to cardiovascular problems. The upshot: Pfizer's sales are expected to be flat this year, at $52.5 billion.
"We do not underestimate the challenges we face," McKinnell told a crowd of analysts gathered in New York City. "We have reinvented ourselves many times, and it's clearly time to do it again."
Pfizer's pressures will make for a weak performance in 2005. The drugmaker will take big charges for its restructuring as well as a $2.2 billion charge related to the repatriation of $28 billion in foreign cash. Even excluding the impact of those charges, the company expects net income for 2005 to be $14.9 billion, a nearly 8% slide from 2004's results. But Pfizer says its cost-cutting initiative will help it generate double-digit earnings growth in 2006. That projection helped send the stock up more than 3%, to nearly $27.
Still, some shareholders pointed out that much of that 2006 earnings gain will come not from healthy sales growth, but from cost-cutting and the repurchase of company shares. "It will be low quality," warns Jon M. Fisher, portfolio manager at Fifth Third Asset Management, which owns about 7 million Pfizer shares. "The market won't greatly reward them [for that]."
So where will the savings come from? Pfizer management cited everything from closing plants to pushing for procurement efficiencies to eliminating duplicative operations. But analysts were frustrated by a lack of specifics from McKinnell, including a target for workforce reductions. Pfizer did say there would be a cut in headcount and the sales force would see "a modest overall reduction." But no hard figures were given.
The drugmaker's long-term growth, however, depends not on its current restructuring, but on a risky bet to extend its $11 billion Lipitor franchise. That cholesterol-lowering drug, more than any other product, has been the key to Pfizer's success over the past decade.
Now the outfit is developing a combination pill, joining Lipitor, which cuts "bad" cholesterol, with a new compound that raises "good" cholesterol. Pfizer is now conducting the critical late stage human trials on that compound, called torcetrapib. If the combo pill pans out, the business will move to switch its Lipitor patients to the new treatment before the old pill's patent expires in 2011.
But the timing of that new drug is uncertain. Pfizer's R&D chief, John LaMattina, said the company hoped to gain approval of the medication based on imaging studies that would show the combo causes plaque in the heart to regress -- in effect, disappear. But he added that it isn't clear whether those studies would be enough to win Food & Drug Administration approval -- and that it was possible the agency would want to see data showing the combo actually cut deaths. If so, the drug's launch, expected in 2008, could be delayed.
And there's a wild card: A patent challenge to Lipitor itself. Indian drugmaker Ranbaxy Laboratories is fighting Pfizer in court over two key Lipitor patents. If Ranbaxy wins that battle, a generic Lipitor could hit the market years earlier than expected. Pfizer General Counsel Jeffrey B. Kindler told analysts that the company expects a court decision on the case late this year or early in 2006. "We believe our position will be upheld," Kindler told the analysts.
But while Pfizer is focused on slashing costs, CEO McKinnell insists it's just as important for the business to rethink its relationship with customers. McKinnell has long argued that Pfizer needs to work to convince payers, like large insurers, employees, and the government, that they should focus on managing their overall health-care bill and not just the piece that comes from prescription drugs.
That's why Pfizer is linking up with Humana in a pilot program in Florida for Medicare. Under that scheme, the two companies will aggressively manage the treatment and drug regimens of 20,000 Medicare patients in the hopes of proving that such pharmaceuticals and lifestyle handling can cut these patients' overall health-care costs.
But while it makes sense for Pfizer to promote such programs, the payoff is uncertain. Consider the drugmaker's previous experience in Florida. A few years ago Pfizer ran a similar program aimed at cutting costs for Florida's Medicaid recipients. It promised to produce cost savings for the state in lieu of cutting its drug prices for that Medicaid population.
While the company says its total investment and cost savings hit $61 million, Florida's legislators weren't impressed. They passed a law in effect barring pharmaceutical outfits from offering those programs in place of discounts.
So while the state is pushing ahead to offer these "disease-management" programs to Medicaid patients, it's at the same time pushing for rebates on drugs. The reason is simple: The rising health-care bills are putting tremendous pressure on places like Florida -- and that means those states will increasingly lean on drugmakers.
"Ten years ago Medicaid was 10% of our [state] budget," says Alan M. Levine, secretary of the Florida agency for health-care administration. "Now it's 26%, and in 10 years it will be 60%. The cost pressure on the state is enormous."
It looks like Pfizer will find that cost-cutting is the easy part. Combating the growing heat from frustrated payers will be a much tougher task.
Barrett is BusinessWeek's Philadelphia bureau chief
Edited by Phil Mintz