Struggling Pfizer seeks change of direction
The sudden and surprising resignation of Pfizer’s chief executive, Jeffery Kindler, demonstrates that mega-mergers are not just bad for the health of shareholders. Citing personal fatigue and strain as the reasons for his departure, Mr Kindler, who drove the $68bn merger with Wyeth last year and was involved in the $60bn purchase of Pharmacia in 2003, is jumping a ship in particularly treacherous waters.
While the past few years have been especially challenging for big pharma, Pfizer has struggled more than most – in the analysis below, the industry’s biggest company has significantly underperformed its peers on a range of measures, from share price performance to sales and earnings. Incoming chief executive, Ian Read, currently the head of Pfizer’s biopharmaceutical businesses and a veritable ‘pharma veteran’ who joined the company 32 years ago, has quite a job on his hands.
Underperformance
The table below, sourced from EvaluatePharma, highlights the extent to which Pfizer has failed to match the performance of its big pharma peer group.
Since 2006 when Mr Kindler took charge of Pfizer, sales have been flat compared to an average growth of 39%, meaning the company has struggled to generate significant earnings growth in recent years.
A 6% predicted decline in sales to 2016 is not as dramatic as some of its peers, despite the massive loss from patent expiry of Lipitor next year. However compared to others in this cohort, it hardly reveals a company with exciting growth prospects.
| Big Phama - Historic & Forecast Valuation Analysis | |||||||||||||||
| Share Price (local) | Total Group Sales ($bn) | EPS ($, normalised) | PE Ratio | Return on Equity (%) | |||||||||||
| 2010 | Change (06-10) | 2010 | Change (06-10) | Change (11-16) | 2010 | Change (06-10) | Change (11-16) | 2010 | Change (06-10) | 2010 | |||||
| Abbott Laboratories | 47.37 | 20% | 35.5 | 59% | 19% | 4.16 | 67% | 41% | 11.4 | -28% | 22.6% | ||||
| AstraZeneca | 48.23 | -6% | 32.6 | 36% | -13% | 5.86 | 101% | -6% | 8.2 | -53% | 32.9% | ||||
| Bristol-Myers Squibb | 25.91 | 13% | 19.4 | 4% | -14% | 2.14 | 59% | 1% | 12.1 | -29% | 19.6% | ||||
| Eli Lilly | 34.14 | -40% | 23.6 | 61% | -13% | 4.60 | 61% | -25% | 7.4 | -62% | 40.4% | ||||
| GlaxoSmithKline | 12.33 | -16% | 44.5 | 13% | 24% | 1.51 | -3% | 34% | 12.7 | -23% | 35.1% | ||||
| Johnson & Johnson | 62.56 | 4% | 62.6 | 24% | 17% | 4.71 | 39% | 36% | 13.3 | -25% | 24.2% | ||||
| Novartis | 54.75 | 4% | 51.2 | 72% | 16% | 4.41 | 57% | 30% | 12.4 | -33% | 14.1% | ||||
| Roche | 138.40 | -30% | 46.2 | 62% | 16% | 12.51 | 99% | 35% | 11.1 | -54% | 67.3% | ||||
| Sanofi-Aventis | 47.92 | -36% | 39.9 | 17% | 9% | 9.04 | 59% | 8% | 6.9 | -56% | 12.9% | ||||
| Peer average (ex. PFE,MRK) | -10% | 39.5 | 39% | 7% | 5.44 | 60% | 17% | 10.62 | -40% | 30% | |||||
| Pfizer | 16.72 | -28% | 67.7 | 2% | -6% | 2.20 | 13% | 10% | 7.6 | -36% | 9.6% | ||||
| Merck & Co | 35.30 | 11% | 45.5 | 44% | 8% | 3.36 | 28% | 30% | 10.5 | -13% | 8.5% | ||||
| note: historical sales figures include Wyeth + Pfizer and Merck & Co + Schering-Plough | |||||||||||||||
In terms of key shareholder ratings, Pfizer’s share price performance, PE ratio and return on equity are not likely to instil much investor confidence. Even the decent dividend payout, one of the few remaining reasons to hold Pfizer stock, was cut in half last year as a result of the Wyeth merger.
The table above also highlights the performance of Merck & Co, a company with many parallels to Pfizer today, having conducted its own mega-merger with Schering-Plough last year for $41bn and recently appointed a new chief executive.
The change of helm at Merck was a planned succession and the numbers above indicate a company with a much more encouraging historical performance and outlook, more in line with its big pharma peers. The performance indicators also support the notion that Merck's deal with Schering-Plough held a lot more merit and has been more widely accepted and supported by analysts and investors.
Change of strategic direction
In attempting to explain the reason for the change of chief executive at Pfizer, the company’s lead independent director, Constance Horner, highlighted: “Today's business leaders need to understand global markets, drive change and innovation, and move quickly to adapt to competitive pressures.”
The suggestion therefore, supported by some analysts, is that Pfizer needs somebody a bit more in tune with the industry and operationally focused, as opposed to Mr Kindler, a former general counsel with no pharma experience prior to joining Pfizer in 2001.
Mr Read would therefore seem to fit that bill very well and investors appeared encouraged, Pfizer’s shares edging 1.5% higher in early trade today.
Intriguingly, the appointment of Merck’s new leader, Kenneth Frazier who will replace Richard Clark on January 1, possibly indicates a company moving in the opposite direction, replacing a pharma veteran with a former general counsel, albeit in Mr Frazier’s case one with considerably more pharma experience, having joined Merck in 1992.
