Healthy Skepticism Library item: 7278

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Publication type: news

Herper M, Kang P.
Transforming Pfizer?
Forbes.com 2006 Oct 19
http://www.forbes.com/2006/10/19/pfizer-earnings-transformation-biz-cz_mh_1019pfizer.html?partner=yahootix

Abstract:

Jeffrey Kindler made his first big appearance as Pfizer’s new chief executive, promising to streamline and remake the drug giant, starting with a series of cost cuts that will allow Pfizer to grow profits even though sales will not grow for two years.

“There will be no sacred cows,” he promised during a conference call Thursday. “Everything is on the table.”

Pfizer posted impressive earnings, boasting that adjusted earnings per share were 54 cents, 9 cents higher than expected. Sales of cholesterol-lowering Lipitor, the world’s top-selling drug, rose 15%, to $3.3 billion, helping abate fears that generic versions of rival Zocor, from Merck, would hurt sales.

But Pfizer warned that sales would be flat in 2007 and 2008 because of a stronger than expected dollar. Without growing sales, Pfizer will show earnings growth by hacking away more aggressively at its costs. The new cost-cutting measures are in addition to a plan to save $4 billion annually that was already in place. The initiative will also help the world’s largest drug firm, with $50 billion in annual sales, make its earnings targets by modifying how much it spends in a given quarter.

The potential for streamlining could be huge. Kindler said that some Pfizer employees are 14 layers from the chief executive.

Kindler said in a statement that since taking over the top slot three months ago, he has heard a clear message from inside and outside the company: “Pfizer needs to be realistic about its operating environment, embrace necessary changes and turn them to our advantage, for the benefit of our shareholders and everyone with a stake in our future,” Kindler said.

In late July, Pfizer’s board abruptly picked Kindler, who had been the company’s chief lawyer, to take over immediately from Henry McKinnell, who had led the drug firm for five years. McKinnell will retire as chairman in February, a year ahead of schedule. It was one of a series of executive upsets at troubled drug firms. In May 2005, Merck replaced Raymond Gilmartin with new CEO Richard Clark, who himself sought to control costs. More recently, Bristol-Myers Squibb ousted Chief Executive Peter Dolan; it has not found a permanent replacement.

Kindler, who had come to Pfizer in 2001 from McDonald’s, was one of three Pfizer executives who had been promoted to vice chairman in a public bake-off for the CEO job. He was seen as a dark horse, but he beat out drug marketer Karen Katen and Chief Financial Officer David Shedlarz because of his vision for the company. Pfizer has said Katen will be moving on; Shedlarz is taking a public role in making Pfizer leaner and meaner.

During Thursday’s conference call, Kindler said that for investors, there is only one question: “What will Pfizer do to make money for investors?”

Chris Shibutani of J.P. Morgan called the third-quarter results “impressive” and said one underappreciated near-term driver of positive investor sentiment was management’s issuance of conservative guidance.

Shibutani reiterated an “overweight” rating on the stock. “While incremental comments on longer-term guidance are more conservative, we applaud this more realistic and, dare we say, potentially ‘beatable’ perspective,” he wrote in a client note. “Results provide a nice boost heading into Nov. 30 R&D Day.”

Elsewhere, Deutsche Bank pharma analyst Barbara Ryan reiterated a “buy” rating on Pfizer shares.

“We believe that Pfizer’s shares represent excellent value,” said Ryan. “The current yield limits downside risk, and we expect another double-digit increase in the dividend in December.”

New medicines including Lyrica, to treat neuropathic pain, and Chantix, to help patients quit smoking, appear to be performing well. But much of the focus in Pfizer’s pipeline is on a single drug, torcetrapib, which is designed to raise good cholesterol and clear plaque out of arteries. Data are expected in March; some analysts predict the drug could be a huge blockbuster. Roche Pharmaceuticals is several years behind with a competing drug, and Merck is also thought to be working on a similar pill that is even further behind. Timothy Anderson, wrote in a recent note that investors are “too skeptical” about torcetrapib.

“We are being honest with ourselves about what we need to do,” Kindler said, “and we are fast about the business of doing it.”

Pfizer shares fell slightly in afternoon trading Thursday. Elsewhere in big pharma, shares of Novartis jumped 3.5% on the Swiss drugmaker’s strong third-quarter earnings report.