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Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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March 15, 2011

Pfizer: Bigger, Um, Isn't Better?

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Posted by Derek

As everyone who follows the industry knows, Pfizer has spent the last twenty years just getting bigger and bigger. Not that they haven't shed people, buildings, and whole research sites - have they ever - but they've shed those resources after buying them first. And as everyone who follows the industry knows, Pfizer's own labs have, either through bad luck or something more systemic, been rather unproductive during that same period. And now Lipitor moves ever closer to its patent expiration. What to do?

Well, this post by Matthew Herper at Forbes has one analyst's answer, and it might just be what Pfizer's CEO is thinking as well. It's something new, all right: get smaller.

Bernstein Pharmaceuticals analyst Tim Anderson has a note out this morning suggesting that Pfizer could sell, spin off, or otherwise divest divisions accounting for $32 billion of its $67 billion in sales, reinventing itself as a pure pharmaceutical research firm like Eli Lilly, Bristol-Myers Squibb, or AstraZeneca.
“We recently met with Pfizer’s new CEO Ian Read, and had we not heard it firsthand, we might not have appreciated just how serious he is about potentially splitting up the company,” Anderson writes. He goes on to say that Pfizer may shrink its revenue base by 40%, leaving behind only what Read calls the “innovative core."

The more cynical among you might be saying "Where this innovative core, eh?", but hear the guy out. He's talking about ditching all of Pfizer's non-pharma assets, and cutting back to. . .discovering drugs. Combine that with the recent cutbacks in various therapeutic areas, and you have a Pfizer that's actually turning its back on the strategy of the last two decades. Bigger, as it turns out, has not been better. Who knew?

Well, a lot of people, for sure. I've been complaining about it, genius that I am, for years now, but I'm sure not alone. It's interesting to see someone at the top, though, who's willing to admit this and to act on it. If he does, though, it'll be impossible not to wonder what might have been if the company hadn't made the big round trip through all those acquisitions. The core pharma assets that they're thinking about cutting back to are the pieces and hunks of a lot of other companies, whose people and departments have been shaken and jerked around something fierce. What shape would they be in if they hadn't been Pfizerized? We'll never know.

Comments (33) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


1. GetThePackage on March 15, 2011 7:42 AM writes...

Most of what you say about Pfizer applies equally well to other companies, especially GSK. In the case of GSK, the legacy companies all had strengths in various areas but the bureaucratic monster created by successive mergers crushed innovation. The mergers created a culture where empty suits proliferated at the expense of scientists. But less than 10 years after its creation, the chickens at GSK have come home to roost with a vengeance. Alas, the price of failure for those who led the company into the wilderness is not very high, they'll get, or have already got, fat pay-offs while the poor hapless scientists get kicked in the ass!

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2. AlchemistOrganique on March 15, 2011 7:45 AM writes...

It never hurts to have a diversified product line, especially revenue-generating consumables that can shore up a company when big risk projects go down the in flames during clinical trials. Besides, being able to buy consumer products at special prices in the company store is a nice perquisite. Anyway, those who aspire to be industrial organic chemists will feel further pidgeonheld by pharma.

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3. You're Pfizered on March 15, 2011 8:00 AM writes...

At a time when many pharma companies are diversifying in order to have a cushion against the volatility of the drug business, Pfizer is going to shed it's lower margin, but still profitable parts?

What would be left, a pure drug company that still struggles to discover drugs facing a sizable patent cliff?

They laid waste to most of the pharma industry in the Midwest and *now* they realize it wasn't the right approach.


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4. PharmaHeretic on March 15, 2011 8:28 AM writes...

Pfizer being innovative and discovering new drugs? Now that is something one has to be seen to believe.

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5. Eka on March 15, 2011 8:30 AM writes...

They laid waste to most of the pharma industry in the entire *country* and *now* they realize it wasn't the right approach, so it’s time to implement the newest BCG/McKinzey masterplan idiocy.

fixed it for ya! :)

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6. HelicalZz on March 15, 2011 8:40 AM writes...

Yes, the 'we need to focus on our core' is a very common refrain from management, and often called for from analysts who look only at the margins of the individual business units. But, profitable sustainable business units should not be shed so lightly and can provide a very important buffer to the ebbs and flows of the pharmaceutical business.

Pfizer is indeed the largest company by pharmaceutical sales, but it is still a bit smaller than JNJ by market cap. JNJ, that diverse conglomerate that only has a portion of their business in pharmaceuticals (just over 1/3 revenues), and appreciates not just size, but diversity of operations.

So what is better, pure play or diversified conglomerate? Analysts prefer a pure play, especially when the margins for the main business are higher. But here I'm content to refer back to Derek's post of December 13 on 'Big Pharma's Lost Stock Decade' and note the better performers were JNJ and Abbott. Those 'pure plays' lagged quite badly.

So Pfizer, I'd agree with you if drug discovery was indeed something of a turnkey operation where investment reliably led to high returns. It isn't though (as we all know), so I think this is a bad move on your part.

As an individual investor, I'll be happy to see it. I'll be inclined to put my money behind the spun out operations and leave your unreliable 'core' business behind.


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7. biotechbaumer on March 15, 2011 8:51 AM writes...

I don't see how divesting themselves of these secondary sources of revenue, will impact the core business of developing drugs. Are there any internal inefficiences at the company that would divert resources or attention away from the drug development arm to areas of consumer health, off-patent drug sales, etc.? Investing 101 dictates that a diversified investments is the best way to success---this strategy would seem to put all their eggs in one basket...

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8. Rick on March 15, 2011 8:52 AM writes...

Q: Pfizer's "Innovative Core"?
A: M&A and PR/IR!

Wait! There's a paradox.

Does... not... compute...

I'm afraid, Dave.

Daisy... Daisy... give me your answer, do...

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9. Susan on March 15, 2011 9:01 AM writes...

IS it really to focus on their core business. You mean to tell me that in about two years Pfizer has had an epiphany? OR is it about the personal pockets of those making the decisions. My thought is about the thousands, the more human side of the story--many who had their lives disrupted. Yes, some for the better but many are are still trying to recover. I think the banks, the CEO's and the Board of Directors are not concerned about the big picture--their mantra is take what we can.

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10. johnnyboy on March 15, 2011 9:12 AM writes...

I just cannot understand the thinking behind such a move. The units they may want to sell (this is all rumors and talk, by the way) are themselves profitable, and are completely independent from the so-to-speak 'innovative core' (how often do discovery researchers interact with OTC manufacturers or marketers ?). How does selling independent units, and profitable ones at that, help the R&D core in any way, apart from a momentary inflow of cash (which Pfizer already has, in droves) ? If it was the same people that were split up between two jobs I could understand the need to focus, but obviously that's not the case. The only minor commonality that I see might be for the of Animal Health division, and in that case it would actually be a bad idea to sell it, as it would mean a significant loss of drug development opportunities (ie. products failing for human-specific reasons but that can still be developed for the veterinary market and therefore increase overall revenue).

No, the only possible reason I see for this is that, once again, it would be a move to make investors happy, rather than to achieve any rational, long-term objective. So the stock price would go up by a few percent for a few weeks, then inexorably fall back to the usual doldrums. The "innovative core" would be left even more vulnerable to pipeline shortages and drug development failures, and the company's long-term prospects and revenue even more under threat.

By the way, Pfizer has already done this in the recent past; in 2006 it sold its Consumer health care business to J&J for 16 billion. At the time, CEO McKinnell said "The proceeds from the sale will allow Pfizer to focus on advancing its pipeline of new drugs and to continue buying products and technology that support its core pharmaceuticals business."

So much for the demonstrated success of that approach.

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11. Cellbio on March 15, 2011 9:17 AM writes...

I agree with Susan. Maybe I am too cynical, but with the spin-offs likely laden with debt, this may be a play to get a few years of stock performance that will provide great personal fortune for the top few, with, as other point out, long term risk for the stability of careers.

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12. g on March 15, 2011 9:36 AM writes...

I agree that this is a move to placate big investors and is terribly short-sighted.

Currently, everyone is trying to diversify and develop revenue streams from less risky and research-intensive areas. Pfizer, after recently acquring Wyeth for $68 billion, now decides that they need to focus.

Pfizer management lacks long-term vision. Their waffling has upended thousands of lives and wasted billions.

If they want the conglomerate business model, then follow it. Have your units operate almost like different entities and don't micromanage them. Works for JnJ, GE, etc. (although this approach has hurt JnJ of late). Then your consistently profitable parts can float the parts that are only sometimes immensely profitable.

Innovation has not been Pfizer's strong suit for the last 20 years, hence the acquisitions. Why would they want to focus on that area, given the track record and the diversification going on in the industry?

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13. Rick on March 15, 2011 9:42 AM writes...

I wish stock performance were not the be-all and end-all company's value, especially a pharmaceutical company, as it seems to be. The past two decades' myopic managerial focus on stock performance and increasing profit maximization at all costs livened up our conference rooms with facile buzz-words like "turnkey operation", "[insert modifier here] play", "focus on our core", "[insert modifier here] model", "FICCO", "FIPCO", "synergies", "value-add, "incentivize", "piece" (as in "add this piece and that piece to create real value-add synergies that incentivize a focus on our core as a pure play FIDDO in Alzheimer's Disease technology"), but they also reflect a mind set that drug discovery is just a bunch of off-the-shelf pieces that we need only arrange the right way and "POOF!" we get new drugs better, faster, cheaper, a.k.a. "increased productivity". It may all be perfectly coherent theory that will earn good marks in B-school and a promotion at a management consulting group, but in terms of drug discovery productivity, it has amounted to rearranging the deck chairs on the Titanic, where "the Titanic" is declining drug discovery productivity.

What's wrong with the straightforward idea of putting products before profits and meeting needs ahead of making mo' money? Companies like Facebook and Twitter have, thus far, resisted going public by espousing an idea of value before profit, and it's made them the most lusted-after companies on the planet. It reminds me of the philosophy articulated by George Merck almost 60 years ago, "We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been." What's wrong with that idea??? It doesn't even seem like Merck (the company) believes it any more.

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14. Still Scared of Dinosaurs on March 15, 2011 10:05 AM writes...

Is it necessarily the case that spinoffs would be laden with debt?

Maybe this is McKinsey's fault but then again maybe it's just an exit strategy for senior management.

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15. Bender on March 15, 2011 10:12 AM writes...

I'm sorry Rick, but I can't allow you to use Facebook as an example of a company that eschews profit in order to create a more valuable service for the users. Mark Zuckerberg has dangled the balls of advertising dollars in his chin so often that reporters almost seem tired of writing about his latest Facebook indiscretion (most recently; he agreed to sell personal information in the form of home addresses and cell phone numbers).

Otherwise, I think you make some reasonable points.

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16. Hap on March 15, 2011 10:18 AM writes...

I don't know if the push for short-term stock gains is the fault of short-term investors, of investment people who make money on transactions, or of management that makes money and then gets out with their layoff substantially cushioned, but it does seem destructive.

I wonder if funding a company on the basis of VC or stock market capital is sustainable anymore. If you have a purpose, something that you believe can make money, it doesn't really matter, because whatever your investors want (or, in particular, what your big investors want) rules. If they want short-term profit, even if it destroys your long-term profitability or survival, you're obliged to give it to them. This makes any purpose with a longer timeframe than that of your big investors unsupportable, and since pharma's timeframe, in particular, is longer than that of most investors, the funding model presents bigger problems for pharma than for others.

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17. Rick on March 15, 2011 10:19 AM writes...

To Susan's comment (#9) about the cost in terms of thousands of employee lives disrupted by Pfizer-esque management, which is terrible enough, I would add another cost: patients' lives and quality of life irretrievably lost by squandering researchers' talents and efforts. But those are "opportunity costs", and a former CEO once told me "I don't believe in opportunity costs."

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18. Hap on March 15, 2011 10:29 AM writes...

...unless you're trying to explain drug costs to your customers, insurance companies, and the government. Then, amazing enough enough, opportunity costs are like God at a tent revival.

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19. Rick on March 15, 2011 10:42 AM writes...

I highly recommend Gary Pisano's book "Science Business: The Promise, the Reality, and the Future of Biotech" (2006, Harvard Business School Press). It seems like a good start, by a serious scholar, at using business analytics to critique present pharma/biotech management strategies and offer new ones that are more consonant with the costs and timelines of drug research and the distinctive characteristics of drug researchers. Venture philanthropy anyone?

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20. Nick K on March 15, 2011 11:04 AM writes...

It would be interesting to hear what former CEO Hank McKinnell has to say about seeing his strategy being turned on its head, but he's probably too busy spending his $200M severance money.

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21. David L on March 15, 2011 11:12 AM writes...

And the pendulum continues to swing.... What will they tell me next? Outsourcing is out? Pull the resources back in-house? .

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22. AlChemist on March 15, 2011 11:15 AM writes...

I think the breakup is bad, after all, more pieces and one can go after J&J - holding company. Besides they need the revenue for the long term, not the short infusement of cash.

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23. Again on March 15, 2011 11:18 AM writes...

Same old, same old ... diversify ... focus on core buisness ... outsource ... lean whatever ... create in-house knowledge ...
so mix them up, follow the brainless MBA cycles, it only makes a difference for short term "shareholder value" bonus collectors at the top of a company. Sadly Dilbert management is real and nowadays the norm - they don't care about people,morale, customer or even the buisness only for themselves.

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24. Again on March 15, 2011 11:57 AM writes...

Same old, same old ... diversify ... focus on core buisness ... outsource ... lean whatever ... create in-house knowledge ...
so mix them up, follow the brainless MBA cycles, it only makes a difference for short term "shareholder value" bonus collectors at the top of a company. Sadly Dilbert management is real and nowadays the norm - they don't care about people,morale, customer or even the buisness only for themselves.

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25. TJM on March 15, 2011 12:04 PM writes...

Late in 2001 I was helping Glaxo redesign their nonclinical process to serve increased demands from their clinical activities (benefiting from harmonization.) On hearing the marriage of GW and SB was finally on again, the scientist team I was working with asked me: "So what did you do at BMS that made it work out?" They were pointing to a Fortune article citing the only Pharma merger in the previous fifteen years that actually created value was when Bristol-Myers bought Squibb.

I was just a research investigator and not really a driver of that “success” in 1991. However I was getting my master's (focusing on improving business performance of R&D.) There, I recall that my professors had just noted that "most mergers just create smoke & mirrors that distract shareholders from realizing that management has been under-performing. The smoke gives them another few years to 'realize the synergy and value - just trust us…' "

Today I wonder if anyone has seen similar analyses for the industry showing what has happened with mergers since GSK was formed. I have been examining the rate of new medical entity filing/launch for the top firms, and plan on posting that analysis on my blog ( when it is complete. Initial results show a marked drop in NME introduction after some mergers. However, this is not always the case. One reason is that some mergers are not for a “deep pipeline” (as with Pfizer buying Lipitor... sorry - Warner Lambert.) The other thing is that we all know that adverse impacts to internal Discovery takes at least seven years to affect filing statistics. Again, anyone see good raw data on this?

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26. TJM on March 15, 2011 12:39 PM writes...

Some readers have asked to see the initial views into NME production vs. mergers. This is still in progress but some interesting patterns can be seen in the link under my initials above. There, I posted performance patterns for the top six firms. Appreciate insights and comments.

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27. GreedyCynicalSelfInterested on March 15, 2011 2:24 PM writes...

Sounds like Pfizer is selling the family silver, just to get more cash to burn in the lab or in stock buybacks. Management will figure out a way to generate stock option grants on the new Pfizer stock. Then, if it does not work out, the options can just be backdated or adjusted so the upper crust gets whatever they think they deserve.

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28. CVL on March 15, 2011 7:54 PM writes...

If they are streamlining the business, I'm surprised that they aren't at least trying to recover some cash by forming spinoffs or selling divisions away. It just seems like Pfizer is recklessly killing divisions and likely a few of the remaining decent drugs in the process.

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29. jaded on March 15, 2011 10:27 PM writes...

BMS was silly for giving up Windex, Clairol, and Enfamil. Then it made the dunderhead move of purchasing Dupont-Merck Pharma to reinforce its "research core".

Pfizer has already gotten rid of Listerine, which pulls in around $800 million with a HUGE margin. Now, it's going to divest other profitable, continual-need, and minimum-development products just to butter-up major investors? Considering the utter lunacy of these business decisions, it's sad that droves of organic PhDs-in-training who are dead-set on being Pharma researchers. Fortunately, there are folks like Chemjobber who have managed to free themselves of career myopia!

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30. Jcdobbs on March 16, 2011 7:07 AM writes...

Wait a minute I am a bit confused. I thought all that you needed to do was make compounds that fall within the rule of five and that would make a profitable drug. What's gone wrong here at pfizer?

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31. Rick on March 16, 2011 7:46 AM writes...

Jcdobbs (#30)
Now don't go picking on the Rule of Five (aka "The Lipinski Rules"). It has actually been kind of useful, largely in the sense of George Box's saying that "All models are wrong, some are useful.", but useful nonetheless. Insofar as it's a de riguer magic totem for VC presentations, it's even been modestly profitable. It's biggest benefit on making profitable drugs may lie in understanding how drugs like macrolides, ketolides, aminoglycosides,cyclosporin, etc... can succeed despite egregious ROF violations.

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32. Mike on March 16, 2011 12:17 PM writes...

Not only does Pfizer lack a discovery core, they lack a development core having favored late stage or marketed products that have the vast majority of scientific risk (and value) removed. I agree that the remaining bits of acquired firms hardly constitute a base for such a strategy.

Nevertheless, their deal making prowess and cash could be applied to translational stage projects since small companies remain starved for partners. Question is, do their scientific evaluation teams have the guts to make the right bets or will they remain paralyzed playing follow the leader behind other firms. Lets hope for the former.

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33. J on March 18, 2011 4:25 PM writes...

Pfizer is in the science business, but they never listened to their scientists. We all knew getting bigger was wrong, betting the farm on HTS was wrong, handing blank checks to marketing was wrong...

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