Markets & Finance

The Lawyer Is In at Pfizer


Jeffrey Kindler's ascent reflects the new challenges drugmakers face

In the race to replace Henry A. McKinnell Jr., the embattled CEO of drug giant Pfizer, Jeffrey B. Kindler was the dark horse. Named as McKinnell's successor on July 28, he had no pharmaceutical experience prior to joining Pfizer (PFE) four years ago as general counsel. But for months, the drug industry has been racked with legal, regulatory, and public-relations challenges, with Pfizer right in the thick of it. Against that backdrop, the 51-year-old Kindler—an accomplished lawyer and veteran of McDonalds Corp. (MCD) and General Electric (GE)—brings much to the table.

Kindler's sudden ascent at Pfizer may be the clearest signal yet that pharma boards aim to change how these sprawling, complicated corporate goliaths are managed. For years, directors have enlisted doctors, scientists, and marketing wizards as CEOs. They were expected to focus on the twin tasks of producing new drugs and persuading patients to ask their doctors about them. Kindler will still be responsible for these matters, but he will also have to craft strategies that have little to do with science or sales pitches.

More and more, Pfizer's business will hinge on managing patent disputes, lawsuits arising from adverse drug side effects, and mounting oversight by federal regulators. And the same will be true for all large drugmakers. "These companies will be picking leaders who are thoughtful, careful, and focused on challenges they need to handle today," says Jeffrey L. Moe, senior director of the Duke University Health Sector Management program. As a lawyer, Moe adds, Kindler "is trained to be concerned about risk. I think he's emblematic of a much larger trend."

RETHINKING RELATIONSHIPS.

Pfizer declined to make Kindler available for interviews, but board member Stanley O. Ikenberry says the company needed a leader who could deal with all sorts of issues. First on the list will be fixing Pfizer's broken drug operations: Its top line has flattened, and its mission to develop ground-breaking drugs has run into trouble. Skeptics might question handing this turnaround to a guy who's only operational experience was running McDonald's tiny Boston Market unit. Nonetheless, says Ikenberry: "We had a general feeling that the external environment for pharmaceutical companies is changing rapidly. Their relationship to patients and physicians needs to be rethought. Jeff is a very strategic thinker."

McKinnell's departure may have been sped up by the dysfunctional succession process Pfizer's board created. The three contenders were Kindler and two other vice-chairmen, Karen L. Katen, who ran the prescription drug business, and David L. Shedlarz, who was chief financial officer for a decade. Each of the three had committed loyalists, according to Kai Lindholst, a recruiter for Egon Zehnder International, who knows many Pfizer executives. "That's not very productive," Lindholst says. "It takes energy away from the real business." Says board member Ikenberry: "There was a feeling that now was the time to move forward and put this planning phase behind us."

The swirl of legal and governmental issues likely swayed the board toward Kindler, and these problems will draw plenty of attention. They include patent battles involving flagship brands such as cholesterol drug Lipitor and painkiller Celebrex, along with claims that Pfizer's sales force improperly promoted some drugs for uses that are not approved by the U.S. Food & Drug Administration. Most recently, a lawyer in New York filed lawsuits on behalf of 19 patients who say the company failed to warn them properly that Lipitor can cause dangerous side effects (see BusinessWeek.com, 8/03/06, "Statins Could Cause Legal Headaches").

Legal woes are endemic in the industry. The day Kindler was appointed, the Justice Dept. launched a criminal investigation of Sanofi-Aventis (SNY) and Bristol-Myers Squibb (BMY) over a patent settlement the two companies reached with a generic drugmaker that wanted to market a low-priced version of the blood-thinner Plavix. Such deals are hardly rare, but Congress has been weighing legislation to restrict them on the grounds that they hurt consumers by blocking low-cost generic competitors to expensive drugs.

GOVERNMENT CRITICS.

In addition, some Democrats in Congress are seeking to overhaul the new Medicare Part D drug benefit, which was a joint effort by insurance companies and the federal government to subsidize drugs that many seniors couldn't afford. In July, several pharmaceutical companies reported better-than-expected earnings, part of which likely resulted from the new benefit. Critics such as House Minority Leader Nancy Pelosi (D-Calif.) believe drug companies have too much power to control prices.

Disgusted by recent estimates that the drug industry will reap $2 billion in profits from Part D this year, Pelosi sent a letter to Speaker J. Dennis Hastert (R-Ill.) on July 20 urging Congress to consider legislation allowing Medicare to negotiate lower drug prices.

The prospect of increased regulations from the federal government makes the Kindler choice look smart, particularly in light of his experience as a Washington lawyer early in his career. Before joining the corporate world, he worked at the Federal Communications Commission and then clerked for a judge and U.S. Supreme Court Justice William J. Brennan Jr. "His ability to be appropriately positioned among all the regulatory constituencies that this industry has to deal with will be essential," says Barbara Ryan, an analyst for Deutsche Bank. "The fact that he's a lawyer is certainly powerful."

As senior counsel at GE in the 1990s, Kindler stood out as a capable litigator who remained cool under fire. In 1994 the Justice Dept. indicted GE on charges that it conspired with diamond seller De Beers to fix prices worldwide. In court, Kindler cross-examined some of the prosecution's witnesses. Six weeks into the trial, the judge threw out the charges—a huge victory for the company and for Kindler. "He probably had [then-CEO Jack Welch] pinging him every two minutes," recalls Brackett B. Denniston III, senior vice-president and general counsel of GE. "That's a crisis manager." Says Welch: "We had a cracker jack legal team, and he was the leader."

Kindler also impressed colleagues at McDonald's. He joined the fast-food giant in 1996 as general counsel, then took over an operations role as CEO for Boston Market and chief of all McDonald's ancillary brands in 2000. A down-to-earth executive known for his quick wit, Kindler didn't balk when the company asked him to work behind the counter. "He's a very quick study and really an exceptional listener," says M. Steven Ells, CEO of Chipotle Mexican Grill, which is controlled by McDonald's.

While Kindler still has to prove he has the makings of a good manager, his hasty appointment at least frees Pfizer from a prolonged and painful succession process. Anthony H. Wild, a former executive of Warner-Lambert, which was acquired by Pfizer, says he always detected tension between McKinnell and both Katen and Shedlarz. That may not be surprising, given McKinnell's reputation as a prickly boss who didn't take enough care to foster relationships with colleagues and investors. "McKinnell felt he was a better financial person than anyone," says Wild, who worked closely with McKinnell during the merger with Warner-Lambert. "No matter how much of an expert you are, there's a benefit to listening to other people. That was not his strength." In the end, the fact that Katen and Shedlarz are longtime Pfizer insiders burdened them with far more baggage from the company's poor performance. Pfizer declined to make McKinnell, Shedlarz, and Katen available for interviews.

PIPELINE PAIN.

Internal jockeying aside, few are surprised that Pfizer's board wanted McKinnell out now—more than a year earlier than expected. Since he took the helm in 2001, Pfizer's stock price has dropped 43%. The American Stock Exchange pharmaceutical index, by contrast, dipped just 22% in that period. Hit Pfizer drugs such as Zoloft for depression have lost their patent protection. In October, Pfizer lowered its sales and profit guidance for 2005. In its most recent quarterly earnings release, the company admitted that its previous prediction that top-selling cholesterol drug Lipitor would hit $13 billion in sales this year is now a "stretch" goal. "Pfizer had a number of downward revenue revisions," says David S. Moskowitz, an analyst for Friedman, Billings, Ramsey Group. "You have to believe board members were scratching their heads."

And Pfizer can't seem to squeeze many replacement hits out of its pipeline. Some of its new drugs have been delayed or failed to catch on. Most recently, Pfizer pushed back the release of Exubera, an inhalable form of insulin that the company hopes to turn into a $2-billion-a-year blockbuster. Facing new generic competition to Lipitor, Pfizer is racing to develop a next-generation cholesterol-control therapy, but early data have raised concerns that the drug may cause high blood pressure.

On July 31, Kindler e-mailed a memo to all Pfizer employees. "To meet our challenges in a rapidly changing industry, we will need your continued help," he wrote. "I would like to discuss our challenges openly…and, most of all, put you in the best possible position to succeed." The e-mail was headlined: "We move forward from a position of strength."


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