PFIZER...bigger was not better

Fire Sale! What Pfizer’s Plan to Sell 40% of Itself Means in Practice By Jim Edwards | March 14, 2011

Pfizer CEO Ian Read is considering breaking the company into little bits through sales and spin-offs, reducing the size of the company by up to 40 percent, according to an investors’ note from Bernstein Research analyst Tim Anderson. Such a plan could produce a smaller, more profitable drug company in the short-term, but the plan is fraught with long-term danger. Observers are agog at the scale of change that Read is proposing. Anderson wrote:

If we hadn’t been there ourselves to hear it firsthand we would not have believed it.

The plan, which could start in 2012, could reduce Pfizer’s revenue base from $67 billion to about $35-40 billion a year. It would also be a complete repudiation of more than a decade of acquisitions that have made Pfizer the largest drugs company in the world.

UPDATE: How Pfizer’s Breakup Plan May Explain Sudden Exit of Former CEO

Following former CEO Jeff Kindler’s acquisition of Wyeth in 2009, it became clear that bigger was not better. Quarter after quarter, promised efficiencies failed to emerge. Anderson suggested that Pfizer was now so big it was facing “diseconomies of scale.” That’s a theory I floated in June last year when I noted that across the industry, consolidation and M&A have failed to deliver increased margins. It may just be that to run a drug company of a certain scale, there are built-in structural costs that can’t be taken out of the system, even if you’re trying to.

Everything must go!

Here are the units Read is thinking of either selling outright or spinning off independently with Pfizer retaining an investment stake:

Unit, estimated revenues:

• Established Products (generic drugs, etc.): $10.1 billion
• Animal Health (vet drugs): $3.6 billion
• Consumer Health (Tylenol Advil, etc.): $2.8 billion
• Nutritionals (mostly infant formula): $1.9 billion
• Capsugel (a pill-making company): $1.1 billion

Absent those units, a leaner-meaner Pfizer 2.0 would consist almost entirely of its prescription drug business. Rx drugs are enormously profitable. At Pfizer, Anderson estimates they bring a 92 percent gross margin and a 35 percent net margin. It’s the 40 percent of non-Rx junk in Pfizer that’s holding the company back, the argument goes.

In the short term, the new company would look like a very good bet indeed. Pfizer recently announced successful phase 3 trial results for tofacitinib, a rheumatoid arthritis drug that Anderson estimates could add $1.4 billion a year in revenues. But that won’t be enough to offset the loss of revenues from Viagra ($2 billion) and Lipitor (13 billion), which both lose their patent protection soon. The loss of Viagra and Lipitor to generic competition is part of a structural trend within the industry — far more old drugs are losing their exclusivity than there are new drugs gaining exclusivity. Which is why the long term is so much more important for Pfizer than the short term.

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