How will Pfizer fight failure?

Pfizer is no normal company. As recently as 2007 it was still the industry's largest player with $47.5 billion (€36.8 billion) coming in from pharma sales alone. Its rise to the top had been nothing short of spectacular; betting so confidently on Lipitor when it bought the drug's marketing partner Warner-Lambert in 2000 for a price most people at the time thought was way over the odds.

Jacky Law

That confidence, which enabled Pfizer to trump all rival bids for Warner-Lambert by $20 billion (€15.5 billion), seems now to have evaporated as it undergoes an equally spectacular and well-documented decline. Despite spending around $7 billion (€5.4 billion) a year on R&D for years, the highest in the industry, the last major product to have emanated from its own research effort was Viagra in 1999.

Shares, which were trading at approximately $26 (€20) when CEO Jeff Kindler took over from Hank McKinnell in 2006, were worth $17.45 in January 2009 — and that's after the company had spent billions buying back stock (at prices far higher than $17.45 (€13.51) to stem the fall. Meanwhile, employee numbers, which stood at 122000 in 2003, have steadily fallen to approximately 86000 today, and the cull continues beyond the sales reps to managers and scientists.

In one sense, Pfizer's rise and fall simply exemplifies the weakness of Big Pharma's traditional business model based on big drugs, big sales forces and big profits. However, because its experience has been more extreme than its rivals, it attracts more attention. Indeed, the mere mention in a recent interview with the Financial Times that it wasn't ruling out the possibility of a major deal was enough to put the rumour mill into overdrive. Goldman Sachs even upgraded the stock from 'sell' to 'hold' regardless of what it might acquire.

A major deal is certainly possible. An analysis by EvaluatePharma back in August 2008, when Pfizer was still resisting the idea of a mega-merger, showed the company to be the only one of the global majors to have a decent cash position and no serious financing commitments.

Analysts, realizing this possibility, have responded to the prospect of a mega-merger with all the enthusiasm of gossip columnists speculating over the marriage prospects of A-list celebrities. They forget that all the evidence suggests mega-mergers tend to erode rather than create value. They forget that all the industry dynamics suggest downsizing is the order of the day. Instead they round up the companies that are possible targets and endlessly speculate about what a Pfizer–Amgen, a Pfizer–Gilead Sciences, a Pfizer–Bristol-Myers Squibb, or Pfizer–Wyeth might look like and how it might perform.

Arguably, the more interesting comments about what Pfizer should do come from the blogs, where you find vast numbers of former employees with time on their hands, insider knowledge about the company and nothing to lose by speaking their minds. Since the January announcements that Pfizer would cut up to 800 research jobs by the end of the year and that another 2400 sales reps and managers are threatened with redundancy, comments from these often disgruntled folk have also been in overdrive.

Unsurprisingly, and at the risk of oversimplifying the situation, they blame top management for decisions that have come too late (not buying Amgen when it was trading at around $40 (€31) in March 2008 rather than now when the price has soared to approximately $55 (€43), for example), for getting rid of older people with all the experience and who do all the work, for not doing nearly enough to dismantle the bureaucracy and for not recognizing the company is still too big and would be better off breaking itself down rather than bloating itself further with a large merger.

Who knows what Pfizer will do? It looks increasingly likely that it will buy itself out of trouble, if only because it can. It that sense, it is eminently normal. Who in their right minds likes to admit failure and start dismantling what once worked so very well?