Pfizer When It Fizzles

In the nonstop trial by fire that has been his seven-months tenure, Pfizer CEO Jeffrey Kindler has shown that he can follow through in taking the shears to the struggling giant's operations. Yet when the new leader took the podium on Monday to announce the firm's "strategic direction," analysts hoping to hear about a major overhaul in Pfizer's business strategy were left scratching their heads, wondering if the firm's former general counsel may lack the necessary vision.

"What [analysts] are looking for is a very different structural model," said Jeffrey Moe, director of business development/emerging issues at Duke University's Health Sector Management Program.

A meeting to discuss the company's "strategic direction" was widely understood as a euphemism for a cost-cutting announcement, and on that score Kindler did not disappoint. Pfizer plans to cut 10,000 jobs (which will include the 2,200 US sales force cuts announced last month as well as cuts to the European sales force, manufacturing jobs, and a slew of middle managers) and close three manufacturing sites and three research facilities worldwide. Yet the other features of the company's five-pronged plan--launching consumer-focused marketing campaigns to support new products, reorganizing operations into five business units, and increasing communication with stakeholders--were less than dazzling.

Analysts have seen the writing on the wall for some time--even before torcetrapib, the saving grace of Pfizer's pipeline, turned out to be a bust. Yet they lament that Pfizer and its competitors still aren't abandoning their old blockbuster business model, despite evidence that it hasn't yielded the spectacular innovations that the drug industry needs to remain profitable.

"The promise of all these big mergers was that we'd have more money for R&D, and that just hasn't proven to be true," Moe said. "The industry has not benefited from the investments overall."

Torcetrapib's failure didn't cause Pfizer's unraveling, but it did illuminate quite clearly what the industry is up against: the slow and cost-intensive R&D process, higher hurdles at FDA, risk of unforeseen adverse events, and the urgency of extending patent life of important products facing generic competition.

"[Pfizer's managers] don't just have one problem--they have multiple problems," said Peter Young, president of investment banking firm Young & Partners. "There's a major structural change in the pharmaceutical industry. The model where you have a large portfolio product is no longer true."

Pfizer, to its credit, does not deny the challenges. Calling his company "too big and too unstructured," Ian Read, Pfizer's president of worldwide pharmaceutical operations, noted that the company would house medical, marketing, and sales under five umbrellas: cardiovascular/metabolic, urology/respiratory, central nervous system/pain, specialty drugs, and customer support (with particular emphasis on managed markets.) "We are determined to win," he said, "and capitalize on our financial strengths."

Jerry Cacciotti, managing director at SDG Life Sciences, described the changes as a "real departure" from how Pfizer once operated, and a recognition that a company can no longer have a single strategy for marketing, say, a drug that's become the standard of care and one in an emerging category. "This is saying that there's a different model for different markets," he said. "I think it's broader than what anyone else has done."

The company is also planning a shopping spree--investing not only in new compounds (both biologics and small molecules) but also in diagnostics, vaccines, delivery systems, and new technologies that will allow it to extend the patent life of some of its current growth drivers. And it pledged to launch two products a year starting in 2010.

Pfizer will maintain its current level of spending on R&D--a move Moe described as "counterintuitive" considering the need to hold down costs, but he suggested that the high prices for biotech drugs might be driving pharma to look inward.

To gauge how the industry leader's new strategy will affect its competitors, all eyes are now on GlaxoSmithKline, which hasn't had Pfizer's pipeline woes but might relax what many describe as a sales and marketing arms race with Pfizer. "It's a bit of a game-theory problem," Moe said.

Young predicts that GSK and the rest of Big Pharma will eventually follow suit. "The feeling two years ago was that Pfizer was a model of success. Now even mighty Pfizer" is changing its business strategy, he said. But the problem, at least for armchair analysts, is that the changes may not be ambitious enough--more tactical tweakings than strategic directions. It remains to be seen whether even incremental innovations among such fiercely competitive players can drive an industrywide transformation.