Pfizer Swallows the Medicine

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Concerns about the sources of future revenue are reflected in the stock price, which has underperformed the Amex Pharmaceutical index in recent years. (It has outperformed the index over the past six months, though, bolstering Kindler's case that a turnaround is in progress). Ryan says the current stock valuation "reflects tremendous uncertainty. Pfizer trades like a bond—there has been a 4.3% yield based on the dividend. The market is highly skeptical about their ability to do this."

That skepticism persisted on Monday, after Pfizer said in its quarterly income report that it expects revenues to remain flat through 2008, while registering only modest gains in earnings per share. Wall Street seemed nonplussed. After the announcement, Pfizer shares slipped 1%, to close at $26.95 on the New York Stock Exchange Jan. 22.

New Model Needed

Pfizer announced the cuts hours after the company said net profit for the fourth quarter was markedly higher than for the same period in 2005, owing to the sale of its consumer health care business to Johnson & Johnson (JNJ). Sales for the quarter were flat, compared with the previous year, at a touch above $12.5 billion.

Pfizer has the industry's largest R&D operations, but they haven't been the most productive. Only three of the company's top 10 sellers were developed in-house. And drug development is an inherently risky process, meaning that not even Pfizer's billions can guarantee new drug hits.

Kindler told analysts on Jan. 2 that the company also needs to branch out from its current business model, which relies on a few blockbuster drugs to generate the bulk of revenue. "Among other things, that means we need to be as effective at selling a large number of $500 million drugs as we are at selling drugs with multibillion-dollar sales."

Goodbye Blockbusters?

The simple fact remains that the world's largest drugmaker would require a raft of $500 million drugs to register on its bottom line. Pfizer has about 150 drugs in development, but Morningstar analyst Brilliant says the pipeline is weaker at the late stage, where Pfizer needs to produce blockbusters to replace Lipitor and other therapies scheduled to lose their patents. "Any drug that is not going to well exceed $1 billion [in annual sales] is not going to move the needle for them," Brilliant said last week.

Mooraj, of AMR, says deemphasizing mega drugs is just a reflection of reality. Amid huge pressure from generics companies, the blockbuster model, where a company enjoys protected market share for 8 to 10 years, is "going be squeezed in the future," he adds.

Pfizer says it aims to increase investment in areas like vaccines and antibodies which it believes will deliver better returns. The company says it will also keep scouting attractive products developed outside its own research program.

Reality or Rhetoric?

With pharmaceuticals in the midst of a merger boom, Brilliant expects Pfizer to focus on acquisitions to synch with its army of salespeople (see BusinessWeek.com, 1/29/07, "Merger Mania Ahead for Pharma"). That means look for a new focus on widely used drugs geared toward common maladies—think Viagra or the smoking-cessation drug Chantix, which was approved last year. However, last year's approval of cancer drug Sutent and the company's formidable oncology pipeline demonstrates an interest in more specialized areas.

Even considering these promising signs, the company faces enormous obstacles in the near term. After all, history is full of companies that have made similar promises that amounted to little more than rhetoric. Kindler fully understands that the Street might be skeptical. As he told analysts Monday, "When attempting significant change, many companies fail to fully commit to the effort—and often lose their way."

Halperin is a reporter for BusinessWeek.com in New York . Weintraub is a senior writer for BusinessWeek's science and technology department.