Pharmaceutical Executive
Pfizer's formidable front entrance in the heart of midtown Manhattan hums like no other in the industry. Compared with most pharma company headquarters, this is a train station.
Pfizer's formidable front entrance in the heart of midtown Manhattan hums like no other in the industry. Compared with most pharma company headquarters, this is a train station.
In the marbled lobby, a crowd jostles past large backlit displays. A bigger confluence of guests, deliverers, and employees builds just beyond the tight security, where lounges, lunch rooms, and offices empty into banks of elevators. From there, visitors ascend into a veritable township of 40-plus floors, each named for the function or department it holds, all spanning the entire "value chain" of this towering industry giant.
Research that spans the globe
Hank McKinnell, Chairman and CEO of Pfizer Inc., meets PE's editors in his office for the latest in a series of interviews with Pfizer's top management. (See "Standing on Scale: Chairman Bill Steere Likes Pfizer's New Size," PE, August 2000; "A Singular Path to Global Power," PE, July 1997; and Karen Katen: "Expanding Roerig's Role in an Industry of Innovation," PE, April 1990.) Later, Karen Katen, president of the global Pfizer Pharmaceuticals Group, and John Niblack, president of Pfizer Global Research and Development, join us. Katen ranks higher, and runs a larger business, than any other woman in the industry. Pfizer veteran Niblack oversees a pharma research organization of unparalleled dimension.
Our interviews with Pfizer's top three executives reveal the inside workings and direction of what is perhaps the industry's most successful company-and still the largest, at $32 billion in annual revenue for 2001, including $26 billion for global pharmaceuticals. Having assumed the chairmanship from Bill Steere in January 2001, McKinnell has had just enough time to put his personal stamp on Pfizer.
He and the others detail the critical steps in the company's integration of Warner-Lambert, acquired in an unprecedented hostile takeover in late 2000. Pfizer's dominance of the merger had at least one fortuitous benefit-lack of ambiguity in leadership, which made moot the typical issue of cultural conflict between the merging organizations.
McKinnell, whose responsibilities include Pfizer's pharmaceuticals, OTC, and animal health businesses, gives a corporate perspective of the company. Katen details changes in product development and marketing since the merger. (See "Another Step Higher," page 52.) And Niblack sketches the structure and strategy of Pfizer's now gigantic R&D unit. (See "R&D on a Grand Scale," page 46.) All three discuss the company's blockbuster products and research pipeline.
In matters that sweep the entire industry-from sales-force wars to state-run price controls-Pfizer often goes its own way, proving it can buck trends or spark them. It has moved aggressively to dominate the physician and consumer sectors and now seeks to outflank its competitors among cash-stretched government payers. McKinnell gives a first-hand account of Pfizer's industry-shaking deal with the state of Florida for Medicaid disease management.
Our conversations span years, but a single day's events cast the longest shadow, putting Pfizer at the forefront of both disaster and relief. At Pfizer, as everywhere, all expectations carry that silent qualifier. Since September 11, the company has searched for new ways to help New York and the nation recover. It has donated medicines, healthcare products, and supply services in addition to the $10 million that Pfizer and the Pfizer Foundation together pledged to the relief effort. Pfizer has also matched approximately $430,000 in employee contributions to date.
R&D On A Grand Scale
All Pfizer discussions begin with its acquisition-a merger as unique for its hostile origins as for its positive outcome. "Those who watch the industry and our company have rated our merger as the most successful integration ever of two companies in the industry," says McKinnell.
Results for 2001 bolster McKinnell's assertion that Pfizer surpasses all other industry mergers in financial performance. (See "Analyst's Choice," page 50.) In the third quarter, revenue rose by 10 percent from the previous quarter, to almost $7.9 billion, after foreign exchange, and net income grew 28 percent, to about $2.2 billion. Excluding foreign exchange, the revenue rise was 14 percent overall and 16 percent for the human pharmaceuticals business.
Even with the current economic downturn, Pfizer expects to stay on target for 2001 growth of 9 percent in revenues, at least 4 percentage points in margins, and 27 percent or better in "diluted" earnings per share. Diluted means "excluding certain significant items and merger-related costs," such as co-promotion charges, loss on divestments, and the March 2000 withdrawal of diabetes product Rezulin (troglitazone).
Five strong products-many inherited from W-L, co-promoted, or licensed-in-continue to drive the company's growth worldwide. (See "Leading Pharmaceutical Products," page 48.) Cholesterol-lowering Lipitor (atorvastatin), formerly co-marketed with W-L, brought $6.5 million in sales through 2001. Cox-2 inhibitor Celebrex (celecoxib), now co-promoted with Pharmacia, climbed to $2.2 billion in sales through the third quarter of 2001. Sales of Neurontin (gabapentin), for neuropathic pain, rose by 29 percent to $442 million; of Zyrtec (cetirizine), an Rx antihistamine, by 30 percent to $251 million; and Viagra (sildenafil), for erectile dysfunction, by 13 percent to $375 million.
Three relatively mature products showed only single-digit growth: antidepressant Zoloft (sertraline), 8 percent to $598 million; hypertension and angina product Norvasc (amlodipine), 4 percent to $881 million; and antifungal Diflucan (fluconazole), 4 percent to $263 million. Declines occurred for three others: Sales of antibiotic Zithromax (azithromycin) dropped 8 percent; of HIV inhibitor Viracept (nelfinavir), 15 percent; and of cardiovascular Cardura (doxazosin), 39 percent.
Leading Pharmaceutical Products
Notable smaller products include Aricept (donepezil) for Alzheimer's, co-promoted with Eisai; Accupril/Accuretic (quinapril/quinapril plus hydrochloro-thiazide) for hypertension; and new product Geodon (ziprasidone) for schizophrenia. Though Accupril/Accuretic and Geodon account for less than $200 million in sales each, they both show strong double-digit growth.
Pfizer has also used the merger and licenses to assemble a credible short-term development pipeline. (See "In the Pipeline," page 54.) In addition to new indications for all major products, it has a new Cox-2 inhibitor, a migraine treatment, an antifungal, and an inhaled insulin in the works. It is co-developing Spiriva (tiotropium), potentially the first once-daily inhaled treatment for chronic obstructive pulmonary disease, with Boehringer Ingelheim.
Former Chairman Bill Steere turned the reins over to McKinnell in January 2001, a few months after PE's parting profile of Steere (August 2000). McKinnell had been head of the pharmaceutical business now under Katen's direction. Since he took charge, says McKinnell, the company has undergone two major simultaneous transitions.
"There was a transition from Bill Steere to me, and there was a transition from the old Pfizer to the new Pfizer," he says. "If there are differences in the company now, it may well reflect the new circumstances as much as the change in leadership."
Fifteen years of working closely together made McKinnell and Steere "think alike about many things," says McKinnell. "But having achieved our goal of becoming the number-one pharma company in the world, just staying number one was not an inspiring or even a practical objective. The theme I set was, How do we move beyond number one?"
Analyst's Choice: Survival of the Fittest
McKinnell brought together the company's 25 most senior people to define that mission and set plans for achieving it. "We came up with a goal of being the world's most valued company to patients, to customers, to business partners, to colleagues, and to communities where we work and live."
To get there, the group identified six areas of needed change:
Meanwhile, as McKinnell pursued his program, the merger proceeded apace. He emphasizes that the union required three integrations in one: "In the pharmaceutical business, we merged the smaller Warner-Lambert business into the larger Pfizer business. In the consumer healthcare area, we merged the smaller Pfizer business into the larger Warner-Lambert business. In research, we couldn't merge either organization into the other. We needed to create a whole new structure and concept. As a matter of fact, we've done that. We now have a single organization with a budget of almost $5 billion a year."
Despite Pfizer's historical opposition to mergers of that scale, McKinnell now considers it a stroke of fortune. "It exceeded our best expectations," he says. "My assumption was that mergers were only for slower growing companies with problems. It never occurred to me that the fastest growing company in the industry would find itself in a position to merge with the second fastest growing company in the industry. So we called it a merger from strength, not a merger out of weakness."
Another Step Higher
Benefits, expected and unexpected, have resulted, according to McKinnell. One, predicted by Steere, is sheer geographic expansion. McKinnell says Pfizer now stands among the top five in nearly every national market, up from at most a top-ten placement for either of the pre-merger companies.
Scale is another obvious reward of the union, as McKinnell describes it: "Scale in both research and development and marketing are very important to us. Pfizer was already large enough in both research and marketing to be fully competitive. What greater scale gave us was the ability to take best practices and to transfer them across the entire organization."
With scale must come focus, says McKinnell. During the past year, the company reprioritized its development pipeline and the role of each research center. "We looked at the various sites to see whether they could specialize more productively. That was an extensive review of all aspects of research, which left us with six major sites around the world as specialized centers of excellence."
A more serendipitous benefit of the merger was the company's new-found ability to conduct internal benchmarking. "Every part of the organization that participated in integration was committed to capturing the best practices of each company and build them into a new and better organization," says McKinnell.
"Our US sales organization benchmarked one force against the other, identified the best practices, and came up with over 200 better ways to do things. Those are wonderful opportunities. Most companies pay consultants millions of dollars to benchmark their activities against others. Here was a chance to benchmark against ourselves."
Every merger aims at cost savings, though not always through downsizing. Pfizer did its share of that, of course: It has 85,000 employees today versus 93,000 total in the two separate companies, and executives held over from W-L's upper management are rare. (See "Medpointe Rising," PE, December 2001.) Pfizer realized cost reductions of $400 million in 2000 and $1.4 billion in 2001. It expects to save another $1.6 billion this year.
But McKinnell says the bulk of savings actually comes through measures other than layoffs: "Both companies knew five to six months before closing that we were about to go through an integration, and we held off adding people and filling key positions. So we went into the integration on day one with a large number of open positions. The cost savings were mostly from eliminating duplications in function and open positions. The other area of major savings, much more than we expected, was in the purchasing and supplier relations area. We put together rigorous processes to attack the cost base and managed to exceed our expectations in purchasing savings between the two companies."
In everything from bulk supplies to agency and media services, McKinnell says the company renegotiated contracts to the maximum level of discounts or "best price" available to either company before the merger. Added volume also allowed rebidding of contracts for even greater savings. Still, McKinnell maintains, adopting the best practices of both companies for all purchasing won the biggest share of cost reductions.
Continued: Another Step Higher
Now, after all the philosophical objections to merger, and only after American Home Products forced its hand, Pfizer looks like an even better company than it was before. As a crowning glory, it has captured the holy grail of all pharma mergers-greater market share. According to IMS Health, before the merger, Pfizer and Warner-Lambert had global industry market shares of 5.5 percent and 3.2 percent, respectively, for a total of 7.8 percent. The new Pfizer world market share now stands at 8.2 percent.
With good evidence, skeptics have long doubted any merger's ability to increase value. McKinnell has a quick answer for them: "By today's New York Stock Exchange prices, we are the third most valuable company in the world. Together we've done very well."
He acknowledges that a unique aspect of this merger is one company's clear advantage over the other. "I'm not sure that I would recommend hostile takeovers," he says. "But it was clear from our experience that unambiguous leadership and speed were the two most important factors here. We didn't have to negotiate with various committees about the selection of people or to decide which site we were going to go to. We had a clarity of decision making and an emphasis on achieving results quickly."
McKinnell points with confidence to Pfizer's assembled lineup of potential new products as further proof of value. He ticks off four compounds in final regulatory review, seven due for filing during the next two years, and another 22 in "exploratory late stage development that we believe could be the blockbusters of the future."
Aside from the pipeline, McKinnell calls attention to what he asserts is an underappreciated advantage Pfizer already possesses: a bevy of recently launched products that hold the main keys to company growth for the next few years. "We have a portfolio of eight billion-dollar products, most of them patent protected well into the second half of the decade," he says. "New indications, new dosage forms, new clinical data supporting their use-that will drive most of our growth during the next three- to five-year period."
One product will be hard to replace. With $6.5 million in 2001 sales, Lipitor has already earned a spot in the blockbuster hall of fame. But no product lives forever, and Lipitor's patent expires in 2011.
"If you're going to be dependent to some extent on one product, Lipitor is a great product to be dependent on," retorts McKinnell. "Ninety-five percent of patients stick to their cholesterol goal with the full dosage range of Lipitor. Among people who should be treated for elevated cholesterol because of cardiovascular risk, that pool of patients just increased three times under the new NEP guidelines."
McKinnell also has a standard answer for the parade of journalists and analysts who ask whether he fears competition for Lipitor and others such as Celebrex: "Great companies are made because of competition, not in spite of it. Competition makes us all better. It causes us to look at the way we do things, to compete with others. It raises what we do to a higher level than we probably would push ourselves to. In the areas in which we compete, there are many more undiagnosed or inadequately treated patients than are currently treated. So our goal should be to increase the number of patients treated, as opposed to simply taking share from each other.
"My advice to our pharmaceutical division is to compete for the 55 percent of the patients whose symptoms aren't adequately controlled. Don't devote all of your energy to competing for the 20 percent of the market that represents Vioxx."
In The Pipeline - A Sampler
Beyond such broad directions, McKinnell claims to entrust the details to his marketing professionals. Yet, he has not hesitated to take the initiative in matters of strategic competition. In several ways, he has ventured into the rough waters of pharma pricing, promotion, and policy. His actions carry strong implications for his company, the industry, and healthcare overall.
Late last year, McKinnell stunned all three by announcing an agreement with Florida that gives Pfizer a role in controlling Medicaid costs in exchange for guaranteed placement on the state's new drug formulary. In short, Pfizer will provide disease management programs for three therapeutic areas in which its products compete: hypertension, diabetes, and asthma. Pfizer guarantees the state at least $30 million in savings from those programs, or it will pay Florida to make up the shortfall. For now, however, the relevant legislation remains under legal challenge from the industry's main association-PhRMA. (See "A More Transparent PhRMA?," PE, January 2002.)
McKinnell first suggested the agreement in principle to Florida's governor Jeb Bush, reportedly over golf. His argument was elementary: "Of the $700 million those diseases cost Florida's Medicaid program, the entire pharmaceutical component is only $70 million. Rather than argue about how to pare that down, why not use education and guidance at the clinical level to produce better health outcomes and even greater savings?"
As he notes, the agreement was exclusive only for the three areas; other companies may apply for different ones. Bristol-Myers Squibb has already offered a similar program for oncology.
Other states have noticed. "We had a long list of states wishing to work with us," says McKinnell. "Our response has been that we want to learn from the Florida program so we know if the disease management and other programs work before we roll them out elsewhere. But, obviously, there's a great demand for that kind of approach."
Logic suggests that Pfizer's apparent checkmate in Florida-breaking ranks with the likes of PhRMA-would make other industry CEOs jealous. "No," says McKinnell. "I actually received compliments on the program from several other CEOs. Nobody complained that this was an unfair practice. They see the potential benefit for both the pharma industry and the State of Florida. It's a real win-win possibility for industry and the payers that are trying to manage healthcare costs in a difficult economic period."
Another Pfizer initiative, announced in mid-January, offers large discounts on its products for qualified seniors. The company has already evoked strong reactions, positive and negative, with the program's publicity campaign.
Outside the United States, Pfizer has also found its own paths through the thickets of pricing, access, and profit making. The company now works with several government and nongovernment organizations to develop solutions for the world's poorest healthcare infrastructures in developing nations. In McKinnell's view, the pricing of medicines plays the least important role in those situations.
"The real progress has been that, two years ago, most people in the world were saying some people aren't getting access to medicines because of patents and high prices. Very few are saying that today. Medicines are available-at very low cost. What is not available is the infrastructure to ensure their proper diagnosis and responsible use. The only way to do that is through partnerships between the pharmaceutical industry, local governments, the international agencies, and nongovernmental organizations."
McKinnell describes several examples involving Pfizer, including a program to distribute Diflucan in South Africa and the multi-company International Trachoma Initiative. "The way to make progress here is by working together."
At home in New York-where McKinnell appears often on local TV-or on the national and international stages as the current chairman of PhRMA and head of the industry's top company, McKinnell keeps an eye on Pfizer's public image. He acknowledges that unilateral good works will never suffice; industry must have dialogue with the public whose respect it seeks to win.
"As a company and as an industry, we may not be doing enough. Our own market research surveys show that those who understand what we do-the discovery and development of medicines-and those who understand the benefits of those products and the high risk of our business are more favorably inclined toward the business than those who are less well educated. The better job we do of informing the public, the better we will be as a company and as an industry."
McKinnell has served as one of the architects of public-image campaigns by Pfizer and PhRMA. He believes the next phase of such education needs to address industry's ability to respond to peoples' key concerns: "I saw an attitude map that compared what people know about the industry, what is important to them, and what they think we do well or not so well. People understand that we are a good investment, that we are good at discovering medicines. They gave us high marks for those accomplishments, but frankly it wasn't all that important to them. There are other areas-access to medicines, cost of medicines-that they say are more important, or for which we are not doing a good enough job.
"So the challenge will be to ensure access to medicines, today and tomorrow. If we are forced to discount too aggressively, that limits our ability to fund research and there will be less access to needed medicines tomorrow. We need to explain the balancing act between short-term cost savings and long-term access to medicines so they can make the right policy choices."
Industry may have a rare chance to start making that connection. From tracking public opinion in the past few months, McKinnell has this bit of good news to share: "We've seen the largest increase in positive perceptions of the industry following September 11. I believe people are starting to understand why it's important that we have a strong research base in the pharmaceutical industry."
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