Less than 24 hours after skewering CEO Jeffrey Kindler (right) in the press following Pfizer’s dismal Analyst Day, Wall Street’s large-cap analysts have done a stunning turnaround. In a rare show of remorse at their pitiless pile-on, these freshly contrite gurus of the pharma sector have declared the next five business days “Be Kinder to Kindler Week.”
And they have vowed that if they can’t say something nice about 53-year-old Kindler, who took charge of the ailing drugmaker less than two years ago, they won’t say anything at all.
“Did I really have to compare Pfizer’s pipeline to nothing more than a bunch of â€˜science experiments’ in the Wall Street Journal,” said Morgan Stanley’s Jami Rubin. “On second thought, no. I recognize that even corporate lawyers making $10 million a year like Mr. Kindler can get their feelings hurt.”
But more than mere sympathy has motivated turning over this new leaf.
Said Sanford Bernstein’s Tim Anderson, whose analyst note was titled “Pfizer: If Your Expectations Were Low, the Analyst Day Was Fine”: “We just finally realized that harping on all the negativesâ€”the Lipitor patent loss, the underperforming drugs, all Phase II failure acquisitionsâ€”was doing more harm than good.”
The week will be kicked off Monday with a Champagne toast at dawn outside Pfizer’s Global Headquarters on 42nd Street (below right) followed by a bracing row on the East River led by Dr. Robert Jarvick.
OK, you get the point of this parodyâ€”and apologies to Ms. Rubin and Mr. Anderson for the fake quotes.
But reading yesterday’s coverage of Pfizer’s Analyst Day was like reading the movie review of a flop certain not to survive its first weekend.
It has become almost impossible, when reading Pfizer press, not to get the sense that Wall Street gives this giant of drug giantsâ€”with its staff of over 85,000 and projected ’08 revenue of $48 billionâ€”maybe five, at most eight years to live. Phrases like “if everythingâ€¦works out, the company could make it through this challenging period” have become reflexive.
And “the window that is starting to close” on Pfizer’s future is now apparently closing on Kindler’s, too, according to the Wall Street Journal’s hot-under-the-collar Health Blog. Twenty months at the helm of the Queen Maryâ€“size drugmaker, and he has not yet done a complete 180, so big investors are conspiring to toss him overboard.
We at Pharm Exec decided to take this doomsday mind-set to its logical conclusion and ask, Well, OK, what really does happen when a massive company with a global footprint like Pfizer doesn’t “make it through”?
Or does it die a sadder, humbler death, dropping divisions and shedding assets until nothing’s left but all the swag with its logo?
We turned to five PFE-following analysts to find out. Fresh from the Analyst Day, each had an equally fresh take on Pfizerâ€”and by the sound of it, neither Kindler nor the ship he is trying to turn around is on the way out yet:
Damien Conover, Morningstar: “The negativity in the press is because the strategy talk we heard at the analyst meeting was the same one we heard over the past few months. Pfizer has a huge war chest of, like, $20 billion, and it makes sense to deploy that capital for the best returns for their shareholders.
“Biogen Idec, for example, offers a pretty good product line in biologics, which they want to enter but don’t have any real in-house expertise in. Unfortunately, because the mega-mergers in the past are what got them in all this trouble, Kindler might not bite.
“We’ll see internal R&D and acquisitions of small and medium-size biotechs. The CFO made a point of saying that said they’re going to adapt size to revenuesâ€”and that means either getting big products or shrinking operations in a big way.”
Barbara Ryan, Deutsche Bank: “The doomsday scenarios relative to Pfizer assume that the company makes absolutely no progress diluting its dependence over time on Lipitor. People expect quick fixes. They want shock and awe.
“The good news is we can all predict the future: Sales will plummet with the loss of Lipitor. Everything is priced in already as far as valuation goes. There’s no mystery here. It’s all a question of Pfizer’s ability to make up the shortfall.
“Kindler’s doing what he canâ€”cutting their cost structure, restructuring, building the pipeline, acquiring development-stage deals.
“Major acquisitions are not an option. If you look at the big biotechs like Biogen Idec, they’re overvalued. If the prices come down, you can be sure Kindler will move fast.
“But the market is giving him very little credit for those three things. And he’ll execute on his planâ€”or he won’t.”
Peter Young, Young & Partners: “It’s very simple. Size, which historically was a strength of Pfizer’s, is now its enemy. Now that the blockbuster model is broken, and really no one knows what the new model looks like, the bigger the company the harder it is to fix.
“Last year Kindler said he was going to make big changes. Thus far he has cut the sales force significantly, bit the bullet with Exubera, restructured R&D and management, and acquired biotechs. He even declared vehemently that Pfizer will not do a major acquisition.
“But is that enough? Outsiders are expressing skepticism whether he can create revenues fast enough to make up for the upcoming losses from patent expirations such as Lipitor. It seems inevitable to some that he will have to downsize dramatically even if things go well with the products they have in late-stage development.”
Seamus Fernandez, Leerink Swann: “This is a result of decisions they made over the past five to seven years and that means it will take at least five to seven years to undoâ€”and with Lipitor and other patent expirations, they’re looking at a loss of up to 30 percent of their revenue during that period. That’s why you hear a sense of urgency.
“Their current pharmaceutical portfolio is basically 80 percent small molecules and 20 percent biologicsâ€”so Pfizer has more risk to patent expirations than a company with biologics or vaccines. The biggest problem, despite their 15 to 20 potential filings through 2012, is that drugs may be hit hard as FDA standards for approval get more stringent.
“They’re just going to have to live with getting smaller, and scaling size to revenue. The head of R&D said something at the meeting that was memorable. He said, The $7 billion we spend on R&D is not a sacred trust. Imagine if Pfizer cut it in half and either returned it to the shareholders or acquired more productive mid-cap specialty or biotech companies with that cash. There are further opportunities to think about, but waiting for the pipeline to deliver could back the company into a corner.
“But it isn’t easy for a CEO to tell the board that he wants to reverse all the decisions it made with mergers and acquisitions over the past ten years because they failed. It remains to be seen if the board even has the mind-set necessary to support Pfizer getting smaller.
“If Kindler can start showing results with his plan over the next few years by delivering on their late-stage pipeline, maybe the board will allow him more flexibility to change direction and diversify the business.”
Les Funtleyder, Miller Tabak: “There’s a lot of negativity coming out of the Pfizer analyst meeting because there’s growing frustration with new management and the slow rate of change. Pfizer stock is very widely held and has been a longtime underperformerâ€”and a lot of people aren’t very happy about it.
“Kindler has made it clear that there will be no big mergers, so he’s essentially asking everyone to continue to be patient until his many small movesâ€”the cost cutting, the biotech acquisitions, the restructuringâ€”show results. But patience is wearing thin. But Kindler can’t exactly go down to the lab and cook up some great new drugs all by himself.
“Despite all the hand wringing, Pfizer is still one of the biggest companies in the world. It’s not a matter of if they survive, it’s a matter of at what magnitude. Worst-case scenario: There’s no replacement for Lipitor, they scale back, and maybe they’re not the biggest anymore. Some analysts have even suggested splitting the company three ways.
“But they have lots of cash and plenty of talented people. Between their current pipeline and their planned acquisitions, some big products are likely to shake loose soon.”