The Big Rethink at Pfizer

After a heart drug debacle, it's reassessing the way it bets on unproven technology

David L. Shedlarz' recent claim to fame was being passed over for the position of chief executive at Pfizer (PFE) last summer. Now, as vice-chairman, he's got what might be an equally tough assignment. Following a debacle in which the company was forced to halt work on its most promising new heart drug, Shedlarz is in charge of overhauling the process of licensing and co-developing products invented by other drug companies. Such deals represent Pfizer's best chance for restocking its drug pipeline before 2011, when its $12 billion cholesterol treatment, Lipitor, loses patent protection.

For starters, Shedlarz plans to shatter the barriers that have prevented several proud Pfizer units from functioning as a team. That should unclog communications channels so that executives can spot unpromising deals and nix them early on. He'll also closely monitor what Pfizer's competitors, large and small, are doing in the same treatment areas. Shedlarz will broaden the definition of collaboration beyond mergers and licensing to include co-promotion deals, equity investments, and other options. These changes, he says, will allow Pfizer "to better assess opportunities and be more disciplined in the amount of money we put on the table."

Wall Street Yawns

Pfizer's old approach was disjointed and bureaucratic. One group of executives responsible for licensing drugs from other companies reported to research and development. Acquisitions were handled through the finance department. And a separate venture capital team was assigned to find and fund innovative startups. As Shedlarz admitted at a Nov. 29 meeting for Wall Street analysts: The structure "didn't serve us well."

So far Wall Street has greeted the new plan with yawns. "You go to analyst meeting after analyst meeting, and everybody tells you they're trying to be more efficient," says Stephen M. Scala, an analyst with SG Cowen & Co. "Pfizer's restructuring is not dramatically different from other companies'."

Nor is it clear how the new structure will save Pfizer from making more bad bets on unproven technology. The problem isn't just that its researchers sometimes back the wrong drug candidates in their own labs. Like all drug companies, Pfizer depends on licensing deals with biotech companies that are trying to pioneer radical treatments. In the past year alone, drugmakers may have poured as much as $17 billion into such deals, estimates life-sciences merchant bank Burrill & Co. Pfizer was an early convert to this strategy, with results that have been mixed at best.

Past Partnerships

In 2003, for example, Pfizer joined with San Diego-based Neurocrine Biosciences (NBIX) to develop an insomnia drug, promising the startup as much as $400 million in payments and the capital to build a sales force. This summer the Food & Drug Administration declined to give the treatment a clear green light, and Pfizer pulled out of the deal a week later. Likewise, in 2003, Pfizer committed nearly $300 million to co-developing Macugen, a drug to treat macular degeneration, a blinding disease. Outshone by a competing drug from Genentech (DNA), Macugen has had sluggish sales and is unlikely to contribute much more than $50 million a year to Pfizer's top line, some analysts say. In November, Pfizer's partner, OSI Pharmaceuticals (OSIP), said it would exit the eye-disease market.

Shedlarz believes that by bringing together experts who used to assess such deals independently, Pfizer will be less likely to stumble into investments with limited market opportunity. And "better coordination will help us understand what other companies are working on and who might have interesting partnering opportunities," he says.

Shedlarz' mission grew more urgent on Dec. 2, when Pfizer pulled the plug on its experimental drug torcetrapib. An independent board monitoring the clinical trials reported an unusual number of deaths among patients taking the drug, which was designed to raise HDL, the "good cholesterol," while lowering the bad. Pfizer has announced job cuts, and there could be more in the works.

With about $20 billion in cash and little debt—a balance sheet that Shedlarz helped build in his 10 years as chief financial officer—Pfizer certainly has the resources to buy its way out of the hole that torcetrapib left in its pipeline. But to meet its goal of launching two products every year on the basis of partnerships, the drugmaker will have to master the art of sifting the winners from the losers. If Shedlarz' program succeeds, Pfizer will have a shot at repeating its one brilliant success in this area: In 1996, it licensed Lipitor from Warner-Lambert, which it later acquired.