Investors want a fresh perspective for post-Lipitor Pfizer, but they're not yet convinced outsider Kindler is the one to bring it
Of all the new CEOs who have taken over major pharmaceutical companies since 2006, Pfizer's (PFE) Jeffrey B. Kindler is the odd man out. Unlike his rivals, who spent decades in the drugmaking trenches, Kindler was a Washington lawyer whose biggest corporate coup prior to joining Pfizer in 2002 was saving McDonald's Corp.'s (MCD) Boston Market franchise from bankruptcy (BusinessWeek, 5/14/01). When asked how it feels to be the ultimate outsider in the struggling pharmaceutical industry, Kindler pauses at first, then answers with confidence. "The industry as a whole needs a fresh perspective," says Kindler, in his first BusinessWeek interview since being named CEO in July 2006 (BusinessWeek, 8/3/06). "I hope I bring to the table the ability to challenge long-held assumptions and provoke people to think about things differently than they have in the past."
It's clear investors believe Pfizer needs a fresh perspective, but they're not yet convinced Kindler is the one to provide it. Since he has has been CEO, Pfizer's shares have fallen 34%, to around 17—a price the stock hasn't seen since 1997. In his short tenure, Kindler has already suffered a string of disappointments. In December 2006 the company had to pull the plug on Pfizer's experimental cholesterol treatment torcetrapib, which investors were counting on to replace lost revenues when Pfizer's blockbuster Lipitor goes off patent in 2011. Less than a year later, Pfizer stopped marketing Exubera, an inhaled-insulin product for diabetes that it once predicted would be a $2 billion-a-year blockbuster (BusinessWeek, 10/18/07). The company has cut 10,000 jobs to slash costs (BusinessWeek, 1/23/07), but with the Lipitor patent expiration speeding toward reality, the Street's pessimism is palpable. Even though Pfizer's price-earnings ratio of 11 has fallen below those of giant rivals GlaxoSmithKline (GSK) and Sanofi-Aventis, only 2 of the 12 analysts who cover Pfizer have upgraded their ratings of the stock this year. And even they stopped short of naming the stock a "buy."
Kindler hears the call for improvements loud and clear. He has spent much of the past year restructuring the company into business units, each of which has its own management team and profit-and-loss responsibilities. On Oct. 7 he added three units, which will handle specialty care, primary care, and emerging markets. (The other three business units are animal health, oncology, and established products.) It's a departure from the old Pfizer structure, which was largely run by geographic managers reporting up to top management in the company's New York office. The idea, Kindler says, is to allow different pursuits within Pfizer to operate as if they were small, independent businesses. "They have to have the authority to move quickly and to innovate, without someone here in New York telling them what to do," says Kindler, 52.
More Money in Oncology
Pfizer is also refocusing its research efforts, pouring resources into lucrative opportunities such as oncology (BusinessWeek, 12/20/07) and less into areas such as heart disease and obesity. He says he will invest only in research that fits two criteria: There aren't enough good drugs on the market already for the target disease, and Pfizer possesses enough scientific knowhow to find new and truly groundbreaking ways of treating it. "Our view is we need to invest to win," Kindler says. "Our shareholders expect us to deploy our capital where it provides the greatest value."
Kindler's changes haven't been enough to satisfy many shareholders, though. Scott Richter, portfolio manager at fund manager Fifth Third Asset Management, says he sold his Pfizer shares earlier this year because he didn't feel Pfizer was making enough progress in research and development. "Cost-cutting can help earnings in the short term, but it's not transformational," Richter gripes. "I don't see the building blocks for something transformational."
A large merger would do the job, and with $26 billion in cash and a strong balance sheet, Kindler could afford to do it. Analysts have been calling for him to make a big move for much of the past two years, and with the credit crisis pushing down valuations of potential targets, those cries are getting louder. "They shouldn't be the Bank of Pfizer, holding all that cash, for God's sake," says Seamus Fernandez, an analyst for health-care investment bank Leerink Swann & Co. "Acquiring a company would give them access to a larger pipeline of products, and it would allow them to wring out more efficiency." Kindler says the company will only consider additions that add expertise in the therapeutic areas he has committed to pursuing aggressively. As for the bargains that may be out there post-crisis, he says, "It's a dynamic environment. We're taking into account how things are changing."
Some analysts are still waiting to see how Kindler's strategy plays out over the long run. "We don't want Pfizer to do a deal just to do a deal," says Linda Bannister, an analyst for Edward Jones, which has a buy rating on the stock. "Restructuring R&D so they can get more drugs to market is what they need to do. What will Pfizer look like post-Lipitor? It's too early to tell."
Kindler refuses to get bogged down in Wall Street's day-to-day mood swings. He has spent much of his time learning the business up-close, going on sales calls with field reps all over the country and, most recently, visiting Pfizer's operations in Korea. "It's continuous improvement, but we've made enormous progress," he says. "We're a leaner organization with clear lines of accountability and less bureaucracy."
A shelf in his New York office serves as a constant reminder of his non-pharma past: It houses a Ronald McDonald shoe and a rubber chicken he got from his McDonald's bosses when he left the fast-food giant. Outsider? Perhaps, but Kindler remains convinced that his inclusion in the fraternity of new drug-industry CEOs can ? mean only good things for the future. "Innovation of the business model is very important," Kindler says. "I look across the industry and see a substantial openness to change."