Has big thinking Pfizer come to a smaller conclusion?

New chief executives often move to make their mark on a company. What Ian Read reportedly has in mind for Pfizer would certainly represent an extreme example of this.

No other pharma company has pursued the mega-merger model like Pfizer. After years and billions spent pursuing the bigger-is-better philosophy, Mr Read – who has been with the company since 1978 and was elected chief executive three months ago – could be considering throwing this strategy into reverse. The fact that Pfizer shares rose on this prospect, raised by a Bernstein Research analyst, suggests stock market investors would not necessarily be against the idea.

Diminishing returns

Pfizer shares, trading just shy of $20 today, have more than halved in value over the last 10 years, underperforming both the S&P 500 and S&P Pharmaceutical Index. At the beginning of 2009 in the wake of the Wyeth bid, the stock fell to a 12-and-a-half year low of $13.

This is a pretty abysmal record, although the company has been handing some cash back to investors over the last decade – a total of $7.97 per share in dividends has been paid out since 2000 while a series of stock repurchase programmes has seen a massive $50.62bn spent on buying back shares, EvaluatePharmadata shows.

Since the turn of the century the company has also spent $218bn on the acquisitions of Warner-Lambert, Pharmacia and then Wyeth. The first of these bought Lipitor, a game changer for the company, the loss of which will be just as dramatic (Pfizer patent cliff dwarfs peers as loss of Lipitor looms, February 1, 2011).

This mega-merger strategy has found few fans over the years – the company has certainly got bigger but R&D productivity has not improved, and the share price keeps declining. Combined with climbing pipeline attrition rates across the industry and ever-mounting pricing pressures, both of which are causing a serious loss of investor confidence in pharma, and Pfizer needed to come up with a response.

Thinking small to think big

According to Tim Anderson, equity analyst at Bernstein Research who recently had a meeting with Pfizer's new chief executive, Mr Read is thinking big. Or to put it another way, thinking small.

Options on the table include the spin off or sale of four non-pharma divisions - nutritionals, consumer health, animal health, and a capsule manufacturing division called Capsugel – these generate annual revenues of approximately $10bn, according to Bernstein.

More radical is the option to spin off or sell the company’s Established Products division, a group of off-patent medicines that also includes a generics unit called Greenstone and a fledgling biosimilars unit.

According to Bernstein, Established Products generated sales of around $10bn in 2010, but this could grow to $17bn or higher from 2011, once Lipitor and other products are added to the mix. This would shrink Pfizer’s revenue base from $67bn to a more sustainable $35-40bn, according to the analyst, representing the company’s “innovative core”.

Bold action

While companies like GlaxoSmithKline, Novartis and to a certain extent Sanofi-Aventis are embracing the conglomerate model, largely to mitigate the ups and downs of drug development, this could be viewed as a risky strategy.

Or in the words of Mr Anderson: “It is valid to ask whether management could be making a short-sighted decision in favour of shareholders, at the expense of the long-term integrity of the [Pfizer] organization by hitching its wagon solely to the prescription pharma side of the business.”

Still, Mr Anderson reckons investors could embrace this idea of big sell offs, saying investors want to see to bold action.

Of course, these eventualities have only been laid out in an analyst note so far – Pfizer only says options are under consideration - and the shape of any plan has yet to be confirmed. But it seems likely the big slice to R&D spending announced last month was only the opening act (Pfizer's R&D cull yet to take shape, February 7, 2011).

By thinking big, Mr Read appears to have come to a smaller conclusion.

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