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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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November 28, 2011

So What Did Lipitor Do for Pfizer? Or Its Shareholders?

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Posted by Derek

That's what this columnist at the Harvard Business Review would like to know. To the question "Was it worth it?", he answers "Probably not", and lists some things that other companies might learn from Pfizer's experience. I doubt that anyone will, though - the Big Acquisition looks so compelling when it comes along, and it's such a once-in-a-lifetime opportunity, and so different from all those other examples from the past, that gee, there's just no alternative. Right?

Here, for reference, is Pfizer stock versus the S&P 500 since the merger was completed in June 2000. Not that the rest of Big Pharma looks much better - for example, Eli Lilly has been an even worse investment over that span (by a bit), and they're never merged with anyone. (Although there is that Imclone business. . .)

No, big drug companies have been horrendous, hair-curling investments over this span, and yes, I'm not fully taking dividends into account. But there are tax consequences to consider on those, too, versus buy-and-hold capital appreciation. The S&P 500 has been paying in the 2% dividend yield range over that span, while Pfizer's dividend payouts have fluctuated (and the yields, too, of course). But is any dividend yield worth taking a 60% principal hit? It's hard to imagine.

At the very least, then, Pfizer's strategy has not allowed it to stand out. Its stock is in the same nasty shape as its brethren - you have to think that nothing would have gotten much worse if they'd never Lipitored themselves, and things might well have been better. Some record!

Comments (17) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


1. biotechchap on November 28, 2011 10:10 AM writes...

novartis (merger of Ciba Geigy and Sandoz) and big acquisitions of Alcon and Chiron ...doing well...

Roche after big acquisition of Genentech doing well...

Your biased mind cannot see this or what ...

enough of pfizer bashing......

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2. johnnyboy on November 28, 2011 10:44 AM writes...

to @1: apples and oranges. Ciba-Geigy and Sandoz were two diversified companies, which merged their pharma divisions together to form Novartis, and spun off other divisions; the merger was desired by both companies. And I think it's a bit early to decide whether the very expensive acquisition of Alcon (in 2010) was actually a good thing for the company. Same thing for Roche and Genentech - way too early to make any conclusion, and I'm not sure the people at Roche Nutley would agree with you that the company is "doing well"...
Despite the use of "merger" between Pfizer and Warner-Lambert, it was really a hostile take-over, between two non-diversified pharma companies. Pfizer paid a huge price, and acquired lipitor but never integrated the Ann arbor site (having worked in Groton in the post-takeover period, I can attest to the general wariness and lack of cooperation between the staff of both sites). And of course Ann arbor was shuttered a few years later, and all the talent there was lost to Pfizer. Same approach with Sugen, and later Pharmacia. By focusing on short-term products rather than talent, Pfizer compromised its long-term survival.

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3. Biotechtranslated on November 28, 2011 11:04 AM writes...

I think I would have to agree with johnnyboy.

I don't think mergers are necessarily bad, but in Pfizer's case, the merger was driven mainly by an already marketed product, Lipitor.

Once the merger went through, the main focus was maximizing the revenue of Lipitor; I think the value of WL's R&D unit was more of an after thought. It was sort of a "Get cracking on selling more Lipitor!! What should we do with R&D? I don't now, we'll worry about it later".

J&J has a history of mergers (actually more like acquisitions since most of their biotech groups came about from small companies). However, J&J basically left the acquired companies as is when they came under the J&J umbrella.

I think the bigger question is, what would have happened to Pfizer had they left Pharmacia and WL as independent units? There would have been a lot less disruption to their R&D process, that's for sure.

The sad thing is, some of the best scientists I've worked with came from places like Pfizer or the legacy companies. These were incredibly productive and innovative people who really thrived in a big-budget R&D environment. Unfortunately, they were not managed well at all.

Pfizer's R&D machine failed not because they didn't fund it well enough or because they didn't have the best people, it failed because the people who were managing the entire R&D process didn't see the damage they were doing until it was too late.


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4. milkshake on November 28, 2011 11:44 AM writes...

if you reward Gordon Gekko behavior of the top management by obscene stock option bonuses, don't be surprised when things don't look so hot 5 or 10 years later. Any person who is intelligent enough to earn the CEO job on the platform of "turning the company around - fast!" will soon figure out for himself that the only way of pleasing the Wall Street analyst is to perform a dramatic reorganization and propose a miraculous cure with the help of consultants, buy companies with product ready to hit the market, slash the expenses by gutting the research, market the hell out of existing drug portfolio (by pushing it for unapproved indications and by inventing a new category of symptoms that should be treated with it long term, and by bribing the physicians) and leaving the smoldering wreck 5 years later, set for the rest of his life.

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5. anchor on November 28, 2011 11:46 AM writes...

#2 and #3- right on the money with a very logical analysis. Now, let us make some bold forecast. I am talking about the merger of SP-Merck that had a very similar intention as Pfizer takeover of Parke-Davies. Knowing what we know about the busted pipeline and clinical trials at SP-M combined during the recent past, when taken together with the Pfizer experience (i.e. tracking the results during the last 10 years), I reckon that we will be revisiting an analogous results in another 3 years time.

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6. luysii on November 28, 2011 11:59 AM writes...

All too true, but the root cause of this carnage, both for chemists and for stocks, is that the search for great new drugs has largely failed. This is because (1) we don't really understand the systems (ranging from the cellular to the organismal level) the drugs are trying to influence. (2) We may not fully understand just how the good drugs we do have actually work.

For 18 examples see

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7. Cellbio on November 28, 2011 1:03 PM writes...

luysii, I agree with you, but wonder if the root cause is as you state, or is it that we have moved to a place where we value our understanding of systems, ability to generate data and resultant desire to predict (forecast markets etc) over empirical testing. I believe in the concepts of mechanistic justification, target validation, but have we fooled ourselves into thinking that just a bit more truth and understanding will crack the code. Perhaps we need to go back to screening biological systems and move forward with compounds that display pharmacology of interest.

So maybe, the recent past record of failing discovery in pharma is derived from a common belief in the value of more information combined with a group-think that had everyone following the same path, same targets, same chemical space, same microarrays, biomarkers, proteomics, etc. I have often heard and like the analogies between pharma discovery and oil well exploration. Has pharma drilled many wells, or in truth, all showed up at the same few fields and sunk too many wells in the same place, amplifying the magnitude of each failure, and diminishing the upside of each success?

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8. CR on November 28, 2011 1:08 PM writes...

It has been quite a while ago so my memory may be a bit fuzzy, I don't think Pfizer actually wanted to "merge" with Warner-Lambert but there hand was played when American Home Products (remember them?) announced they were merging with WL. Pfizer was faced with losing the revenue and thus had to go after WL in order to keep all of the revenue. How times have changed - at the time, P&G was actually looking to acquire AHP/WL but backed off.

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9. darwin on November 28, 2011 1:26 PM writes...

Derek, dude. I hate Pfizer too, but at the surface, the price of the stock is not in so much direct control by the company. May be reflective of a companies sucess...but more than likely not. So is it a fair assessment to compare Pfizer's success by their plummeting stock price over a 12 year period to a totally diversified beast like the SP500? That is the whole point of diversification...volatility is relatively more stable. People got killed in pharmaceuticals because they banked big in a cyclical sector that hasnt panned out. Could have made a lot by shorting the industry instead. Not to mention the political rodeo that influences the Rx company stock prices. All hindsight. So the question should what would you have been better off investing in over that period? You all should have done like me and bought a big ass house.

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10. alig on November 28, 2011 2:25 PM writes...

It's too bad you can't take back all the bonuses paid because of illegal marketing that inflated past sales. The billions in fines paid the past couple years for past illegal activities make it more difficult to compare current earnings with those of a decade ago (when earnings were inflated due to illegal selling). Combine the two events, overflated sales a decade ago, and the current drag on earnings from fines and you end up with a steep decline in stock value.

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11. Fred on November 28, 2011 7:27 PM writes...

Had Pfizer actually MERGED with WL,PHA,WYE, they'd be doing a lot better. Instead, what we see is their R&D is perhaps 10% the size in manpower of what it was ten years ago -- if that. And I'm not talking just legacy WL people, etc. Even Grotonites have faced the chopping block. Buying short-term products while gutting your long-term prospects serves the "1%" CEO's and associated toadies very well, but does nothing for investors, employees, or patients with underserved medical conditions.

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12. Anonymous on November 28, 2011 8:19 PM writes...

The problem is that when big pharma gets a blockbuster like lipitor, they get complacent and they get their butts kicked when it goes off patent. So, what's the solution? Stay away from mega blockbusters, when they go off patent the company suffers, big time. Instead, get a handful of smaller drugs (say 14 drugs selling 0.8 billion). That way when one or two go down, their is less impact on the bottom line.

The problem is, big pharma is all about greed and their managers are too moronic to see this!!!

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13. Anonymous on November 28, 2011 9:48 PM writes...

The pursuit of Lipitor destroyed the industry. Too much greed. Too little respect for those who nurtured it. Too much ignorance to realize that people and knowledge are assets.

I wonder if other companies would have fallen into this greed trap if Pfizer had not been the winning bid. While I dispise Pfizer, I doubt very few companies would have been more successful today riding upon the glory of Lipitor.

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14. BioPharmer on November 29, 2011 11:09 AM writes...

I'm siding with a lot of the commenters here in that the WL deal was actually a good thing for Pfizer. It was the goose that lay the golden egg for this company. Ten years ago everyone thought Pfizer had the best prospects of all the pharma companies for future growth with a vast pipeline and a moneymaker in Lipitor to fund the R&D. It's hard to argue against $131B and counting in revenue just from Lipitor. Who knows if Pfizer would be in a much worse position without the WL merger.

Unfortunately, executive mismanagement of post-merger activities (research integration & Pharmacia merger) and bad luck on drug targets (Torcetrapib) caused the company to squander away the value added from the merger of WL and Pfizer. The concept and price-point were right but the execution was a failure.

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15. Student on November 29, 2011 12:24 PM writes...

@4 & @10
This makes the most sense. From an investor point of view I avoid the large-cap pharm because they are mostly pump and dump. Not in the traditional sense where the company is hyped up through media, but in the sense that they are hyped up through their financials. Their valuation are teetering more and more on a false financial structure that uses projection of profits and hand-waving of their current state. And it really gets back to the core issue Derek has mentioned time and time again: This is a unique industry where discovery to market takes 10+ years; executive/management carrot-and-stick lead themselves [while claiming a long term vision] to easy goals with big financial rewards; since they aren't hanging around past the carrot, no one is holding their feet to the fire.

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16. barry' on November 29, 2011 2:28 PM writes...

We don't know the biology well enough to tell a good drug from a blockbuster. That was true of the first $billion property (Tagamet. Business Development people inside SmithKline figured it was worth $100million/annum; worth launching but not worth a lot of chemistry to expand the patent) That was true of Viagra (aiming to be just another treatment for angina--who knew?) that was true for Lipitor (one of many me-too drugs following Mevinolin)That was true of Gleevec (originally an orphan drug!)
A mega-corporation like Pfizer determined to find a blockbuster to replace Lipitor is trying to do what's never been done. All the blockbusters were recognized in hindsight and they emerged from companies willing to work on merely "good drugs"

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17. soon2bdesigner on November 30, 2011 10:22 AM writes...

@ 8 CR-
Yes! I forgot about American Home Products. That is what I remember hearing in the halls - if AHP bought WL, Pfizer stood to lose all revenues from Lipitor. So it was a "defensive hostile takeover." Probably best for Pfizer, but very bad for the industry as a whole. I also remember hearing a presentation from Bill Steere a couple of years prior to the WL takeover, in which he said, "We will never merge with another company." Wonder what would have happenned if Steere had still been at the helm when the WL situation went down?

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