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Company and Industry Background

Pfizer was established in 1849 in Brooklyn, New York, by cousins Charles Pfizer and Charles Erhart with a loan of $2,500 from Pfizer’s father. Today, 167 years later, Pfizer Inc. has international revenues of $49 billion, which makes it the second-largest pharmaceutical manufacturer in the world. Despite Pfizer’s success, the company has faced many challenges over the last few decades. The pharmaceutical industry is heavily influenced by legal, political, and technological forces, and all indications are that the industry will continue to experience dramatic changes.

Since the passing of the Food and Drug Act in 1906, the Food and Drug Administration (FDA) has had regulatory authority over drugs in the United States. The scope of its initial authority was limited and in 1938 President Roosevelt signed the Food, Drug and Cosmetic Act (FD&C) into law, which significantly expanded federal oversight of drug manufacturing and marketing. In addition to granting the FDA authority to mandate pre-market review of drugs, the FD&C also allowed the FDA to regulate drug labeling and advertising. Then, in 1992, Congress passed the Prescription Drug User Fee Act, which enables the FDA to collect fees from drug manufacturers to aid in funding the pre-market review process for new drug approvals. The effect of these reforms was significant increases in the time and cost for drug manufacturers to bring new drugs to market.

In 2006, a study estimated the cost of bringing a new drug to market was between $802 million and $2 billion, depending on the type of drug being developed and the number of drugs being developed simultaneously. The study found that approximately 60% of the total cost of drugs was related to pre-market clinical trials required by the FDA. As inflation, increased regulation, and other factors have affected the pharmaceutical industry, a 2012 study indicated that the cost per drug for the largest manufacturers has increased to over $5.5 billion. For Pfizer, the total Research & Development (R&D) cost for each drug that received FDA approval was $7.7 billion between 1997 and 2011. The steep rise in development costs has forced many large drug manufacturers—including Pfizer—to cut R&D budgets in an attempt to control rising costs.

The reduction in R&D funding in reaction to expanding costs has led to stifled innovation and revealed a crisis looming ahead for many large drug manufacturers in the industry. Not only have many drug companies’ blockbuster drugs gone off patent in recent years, but the reductions in R&D spending have resulted in drug pipelines that have failed to produce anything of significant value. The number of new drugs approved by the FDA per billion dollars of R&D expenditures has halved every nine years since 1950. The rapid increase in the cost of drug development and the reduction in the approval frequency of blockbuster-level drugs has led many industry experts to largely consider the current, fully integrated business model of large pharmaceutical companies to be unsustainable.

Business and Strategies

Like most large pharmaceutical manufacturers, Pfizer pursues a “blockbuster” business model that is heavily reliant on its R&D pipeline to consistently develop and launch high volume drugs—drugs with expected annual revenues of $1 billion or greater. In 2012, Pfizer began restructuring its operations into a new commercial operating model. Pfizer divested its infant nutrition business for $11.9 billion and spun-off its animal health unit, Zoetis. Additionally, Pfizer restructured its operations into two primary business segments: Innovative Products and Established Products. Pfizer’s Innovative Products business is further divided into the Global Innovative Pharma (GIP) and Global Vaccines, Oncology, and Consumer Healthcare (VOC) businesses. Ian Read commented regarding the restructuring: “This represents the next steps in Pfizer’s journey to further revitalize our innovative core. Our new commercial model will provide each business with an enhanced ability to respond to market dynamics, greater visibility and focus, and distinctive capabilities.” Exhibit 1 contains some useful financial comparisons between Pfizer’s Innovative Products and its Established Products.

Inside Pfizer

12-3aManagement Team

CEO, Ian C. Read.

Ian C. Read was elected CEO of Pfizer in December of 2010 and Chairman of the Board in 2011, taking over from Jeffrey Kindler. Read has spent his entire career at Pfizer, starting as an operational auditor. Read’s B.S. in chemical engineering and accounting experience set the groundwork for a successful career in pharmaceuticals. Some of his previous roles included CFO of Pfizer Mexico, Country Manager of Pfizer Brazil, President of Pfizer’s International Pharmaceuticals Group, Executive Vice President of Europe, and Corporate Vice President. Read also serves on the boards of Pharmaceutical Research Manufacturers of America (PhRMA), which represents the leading innovative biopharmaceutical research companies.

Executive VP Strategy Portfolio and Commercial Operations, Laurie J. Olso.

Laurie Oslo oversees long-term strategy, execution of commercial objectives, and advises portfolio functions for R&D investment strategies. She started working for Pfizer in 1987 in Marketing Research. As an economics graduate from the State University of New York at Stony Brook and with a MBA from Hofstra University, her experiences span across domestic and global leadership positions in marketing, commercial development, strategy, analytics corporate responsibility, and operations. Her most recent role was Senior Vice President of Portfolio Management and Analytics, and within that role she was part of the task force that “redesigned Pfizer’s R&D organization to strengthen its pipeline and improve efficiency.”

Executive VP Chief Development Officer, Rod MacKenzie, PhD.

Rod MacKenzie received his PhD from Imperial College, London, after getting his chemistry degree from the University of Glasgow. As the co-inventor of Darifenacin, which was sold in 2003 due to regulatory issues, MacKenzie held various positions within Pfizer before assuming his current position. His role oversees “the development and advancement of Pfizer’s pipeline of medicines in several therapeutic areas.” He serves on the Portfolio Strategy and Investment Committee and sits on the Board of Directors for ViiV Healthcare.

Executive VP Business Operations and CFO, Frank D’Amelio.

Frank D’Amelio joined the company in September 2007 and oversees finance, business development, and business operations. He has been ranked as a top CFO for various years by Institutional Investor magazine. He has led the organization in many mergers, spin-offs, and sales, such as: Pfizer and Wyeth merger, sale of their nutrition business, and the spin-off of Zoetis. His experience comes from his many leadership roles at Alcatel-Lucent, including Senior Executive Vice President of Integration and Chief Administrative Officer, and his experience as COO of Lucent Technologies. Frank earned his MBA in Finance from St. John’s University and his bachelor’s degree in Accounting from St. Peter’s College. Representing Pfizer, he currently serves on the Board of Directors for many organizations. They include, Humana, Inc., Zoetis, Inc., the Independent College Fund of New Jersey, and the Gillen-Brewer School.

12-3bMajor Shareholders

Pfizer is a publicly traded company with approximately 6.2 billion shares outstanding at December 31, 2015. According to Yahoo Finance, among Pfizer’s primary shareholders are institutional investment companies Vanguard Group, Inc., BlackRock Institutional Trust Company, and JPMorgan Chase & Co., who own 6.32%, 4.95%, and 1.89% of total outstanding shares, respectively. Additionally, Pfizer’s only major non-institutional shareholders are all executive-level leadership within the organization.

12-4Competitive Landscape

12-4aMajor Competitors

The pharmaceutical industry invests heavily in research and clinical trials and relies on obtaining FDA approval and patent protection for its products to ensure prolonged profits while the next “miracle” drug is under research. There are high payoffs when a drug is successfully brought to market; but there also great costs, in the form of massive time and monetary investments for failures, if it is not. Among Pfizer’s largest competitors are Merck, Novartis, Bristol-Myers, and Johnson & Johnson. Exhibit 4 contains some comparative financial ratios for these competitors.

Exhibit 4Comparative Financial Ratios

Source: Morningstar.com