The Rx for Growth: "Discover Drugs"


Sometime over the next several weeks, Pfizer (PFE) expects to complete the $55 billion acquisition of drugmaker Pharmacia (PHA). Upon completion, Pfizer will be the third-largest corporation in the U.S., with a higher market cap than any company save for Microsoft (MSFT) and General Electric (GE).

Pfizer not only is the biggest pharmaceutical company, it's also growing faster than any rival. Its earnings increased 20% in 2002, compared to the drug industry's 1% average growth, according to Michael Krensavage, analyst for the investment bank Raymond James.

Yet some analysts frown on Pfizer's growth rate and its tremendous size. These characteristics, critics say, are driven largely by Pfizer's big acquisitions -- such as the $90 billion hostile takeover of Warner-Lambert in 2000 -- which are meant to shore up the company's pipeline. Another factor: the practice of "in-licensing" drugs, whereby Pfizer shepherds the development of another company's lead compound through the final phases of development, then helps the other company sell and market the drug in exchange for half the profits. Pfizer's critics say it has become more of a marketing and merger machine than a center of innovation (see BW Online, 1/24/03, "Two Pep Pills in Big Pharma").

Pfizer Chairman and CEO Hank McKinnell flatly rejects such criticism. He points out that Pfizer spends more on research and development than any other drugmaker -- and its growth rate is a reflection of that investment. Thus, he says, it deserves the highest valuation in the industry. On Jan. 22, after Pfizer reported a fourth-quarter profit of $9.1 billion ($1.46 per share) on revenues of $32 billion, McKinnell spoke with BusinessWeek Online reporter David Shook about the industry's slowdown in earnings, the prospect for a federal Medicare prescription-drug law, and Pfizer's future growth. Edited excerpts of their conversation follow:

Q: How would you characterize 2002 for the drug industry?

A: It was a difficult year. Prescription growth slowed, particularly in the U.S. Largely, I believe, because of increasing co-payments for employees, and to some extent the weaker economy, which has led to more layoffs and more people losing their health benefits. Plus, fewer new drugs were approved in 2002, compared to previous years [only 17, vs. more than 30 in prior years].

Q: What about this year for Pfizer? You're in the process of rolling out six new drugs -- Relpax, Rebif, Vfend, Spiriva, Geodon, and Bextra. Could any of them generate $500 million or $1 billion in annual sales?

A: They certainly could. Relpax will enter a therapeutic market [migraines] that is well in excess of $1 billion. Spiriva, for chronic obstructive pulmonary disease, addresses a major unmet medical need. Vfend, an antifungal medicine, could surprise everyone, and Bextra enters an enormous market for arthritis pain.

Q: Pfizer has the highest valuation in the industry because its earnings growth is the highest. But the growth is slowing. What are you doing about that?

A: I'll acknowledge the growth rate is slowing, but only from earnings growth of 20% annually to 16%. That's still a very high rate above the rest of the market. And Pfizer alone is spending $100 million a week on R&D to discover products. I'd say that's doing quite a bit to maintain growth.

Q: How do you respond to analysts who say you're acquiring Pharmacia to buy your way out of a slowdown in earnings growth?

A: The acquisitions do help with earnings growth because of the immediate impact of cost savings -- eliminating the duplications and increasing efficiency. But that in fact was not our strategy in acquiring either Warner-Lambert or Pharmacia. Warner-Lambert became available because they felt they needed a partner, and frankly, the same thing happened with Pharmacia.

To be successful in this industry, you have to be able to discover drugs. That's why we're spending $100 million a week on R&D and why we signed three new partnerships last year with other companies. The real benefit of the latest deal with Pharmacia is the additional markets we enter. Pharmacia has expertise in several specialty markets -- oncology, ophthamology, and endocrinology -- that we would like to invest in.

Q: What therapeutic market does Pfizer need to invest in most?

A: Cancer. And Pharmacia has a strong pipeline of oncology products, so with the acquisition we'll fulfill that goal.

Q: What single drug in your pipeline do you estimate has the highest potential market value?

A: The single biggest may wind up being the biggest drug in the entire industry. It's a CETB inhibitor that adds to the power of Lipitor to reduce LDL -- "bad" cholesterol -- while also increasing HDL -- "good" cholesterol. This is a drug that our data indicate will have a profound reduction in cardiovascular risk. It's entering late-stage [phase 3] clinical trials.

Q: Recently, regulators have been looking into whether Merck (MRK), through its pharmacy-benefits management company Medco, may have given preferential treatment to Merck's drugs over rivals'. Any comment?

A: We believe we've seen evidence of that in the cholesterol-reducing market, where Merck's Zocor and our drug Lipitor compete. Our drug has a list price 30% below Zocor's and [according to Pfizer's clinical data] is more effective. Yet Zocor's market share within Medco is higher than it is throughout the industry [according to published reports].

Q: In 2001, Pfizer signed a deal with the State of Florida under which you promised to reduce Florida's Medicaid costs in exchange for the state buying Pfizer drugs at reduced prices. Are you looking to sign similar deals with other states?

A: We don't have annual cost comparisons yet because the program is new, but the early evidence suggests the program saves the state money on hospital admissions and leads to improvement in health-care outcomes. Plus, we're selling more pharmaceuticals to the state through the program. I do think other states will follow suit. There are some states that don't have the data or management capability to support such a program at the highest level. But the Florida program is a model for other states.

Q: What do you think of President Bush's plan to reduce or eliminate the tax on corporate stock dividends?

A: It would have a very important long-term benefit to the economy. The double taxation of dividends essentially encourages companies to seek financing more through debt than equity, adding to financial risk at many major companies -- though Pfizer is not one of them. So I support Bush's plan.

Q: Bush has also said that given the threat of a smallpox terrorist attack, he, along with the U.S. military and thousands of health-care workers, will get inoculated for smallpox. He also says any American who wants vaccination or a booster shot can get it. Yet the only known batches of the smallpox virus in existence are stockpiles held by the U.S. and Russian governments. Would you get inoculated?

A: The risk of an outbreak is very low. I was inoculated a second time after a small outbreak in the 1960s. My best guess is that I still have sufficient immunity to avoid the catastrophic consequences of exposure. But for some of my children, particularly the one who is a medical student, I probably would recommend vaccination.

Q: What's the likelihood of a federal Medicare prescription drug law this year?

A: The chances of some kind of reform are definitely higher than they were a year ago. I think we'll see President Bush in his State of the Union address recommend comprehensive reform of health-care delivery in the U.S. But I think he'll recommend a much more comprehensive approach than just a stand-alone prescription drug benefit[ and] in his next federal budget proposal, we'll see significant funding for Medicare reform.


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