Pfizer Swallows the Medicine

As it sheds 10,000 workers, the pharmaceutical giant under CEO Jeffrey Kindler also hopes to sharpen operations and wean itself from blockbusters

by Alex Halperin and Arlene Weintraub

With its dispatch of 10,000 jobs and a handful of research and manufacturing operations, troubled pharmaceutical giant Pfizer ended months of speculation Jan. 22 about how it aims to return to Wall Street's good graces. The move signals an attempt by the sprawling organization to adjust to an era where it's far more difficult to rely on blockbuster drugs to do the financial heavy lifting.

The cuts, which include more than 2,000 sales staff reductions announced last year, are expected to shave as much as $2 billion in annual costs from the company's books and amount to about 10% of Pfizer's global work force. Beyond reducing its labor force, Pfizer (PFE) also plans to close manufacturing plants in Nebraska and New York, and three research centers in Michigan. The company also may close research operations in Japan and France, and sell a plant in Germany. Pfizer says it will divide U.S. pharmaceutical operations into four separate units, a way to promote entrepreneurship and accountability.

At a press conference Monday, Chief Executive Jeffrey Kindler deflected questions about Pfizer's recent unsteady performance and said investors ought to focus on changes since July, when he was promoted from general counsel. "We have a new leadership team. We're demonstrating a sense of urgency," Kindler said. "We're creating an organization with fewer layers, greater spans of control, more autonomous units. We're focused on pushing decisions down through the organization where they belong."

Pfizer is right to seek to become more "nimble," says Hussain Mooraj, an analyst with business-process and tech firm AMR Research. Among other deficiencies, he says, Pfizer has been notable in the past for having its manufacturing "spread all over the place without any focus on inefficiencies." The question is whether the transition to a more cohesive system can be achieved, while the organization weathers the upheaval of major job cuts. "It's a huge task ahead," Mooraj says. "How do you downsize by 10,000 of your work force and keep a leading-edge organization chugging in the right direction?"

Leaky Pipe

For New York-based Pfizer, the restructuring marks an effort to impose change after a year that saw its multibillion-dollar antidepressant Zoloft go off patent. And its stagnant stock price contributed to the early departure of CEO Henry "Hank" McKinnell. (see BusinessWeek.com, 8/3/06, "The Lawyer Is In at Pfizer").

Analysts are also troubled by Pfizer's thin late-stage pipeline—a problem it shares with other Big Pharma players. In December, Pfizer halted a late-stage clinical trial of the experimental cholesterol drug Torcetrapib after more patients died in a group taking the drug in combination with Pfizer's $12 billion heart drug Lipitor than in a group taking only Lipitor (see BusinessWeek.com, 12/4/06, "Pfizer's Bitter Pill").

The world's top-selling drug, Lipitor accounted for almost a quarter of Pfizer's 2005 revenue. With its patent due to expire in 2011, Torcetrapib was supposed to assume Lipitor's yoke as the company's revenue workhorse. Without that new drug, it will be "virtually impossible" for Pfizer to immediately replace sales lost to generic versions of Lipitor, says Morningstar analyst Heather Brilliant.

Skeptical Response

The efforts to streamline Pfizer's massive R&D operation were also expected. Before the announcement, Deutsche Bank analyst Barbara Ryan had said "Look at the budget—$7 billion—it's hard to imagine they can't find ways to save money." Facing the same struggles as its peers, Ryan says Pfizer could move clinical trials to Eastern Europe or outsource data management from those trials to India or China. She notes, though, that trimming costs won't create growth.