For Pfizer Chief, The First Order Of Business Is Research

In Read's first presentation to investors, the new chief executive laid out plans to reorganize research as part of a strategy to improve productivity and cut spending by $1.5 billion in 2012.

Pfizer Inc.'s new CEO Ian Read laid out his initial plan for turning around the troubled drug giant during Pfizer's fourth quarter sales and earnings call on Feb. 1.

The event marked Read's first public comments to investors since taking over the CEO post from Jeffrey Kindler in a sudden transition in December (Also see "Pfizer Turns To Insider Ian Read To See It Into Post-Lipitor Era" - Pink Sheet, 6 Dec, 2010.).

"My job as CEO is to manage and focus our capabilities, assets and talent to drive the most value for our shareholders," he said. "We will invest our human and financial capital in those areas where we can lead, and where we don't have core capabilities we will look to partner or license assets."

Despite being at the helm less than two months, Read has made difficult decisions regarding the research organization. The company is cutting its R&D budget for 2012 to between $6.5 billion to $7 billion, about $1.5 billion lower than a previous target of $8 billion to $8.5 billion. That comes on top of deep cuts already made; Pfizer's research budget was $9.4 billion in 2010. At the time it announced its merger with Wyeth in January 2009, the companies had a combined R&D budget of $11 billion.

To get there, Pfizer is implementing job eliminations, facility closings and shifts in priority areas. "I fundamentally believe in the power of innovation in pharmaceuticals, but I recognize to be successful over time, we need to substantially improve the rigor of our approach," Read said. "We will sharpen our focus on the core research areas that give us the best promise of scientific and commercial success."

Pfizer Outlines Five Core Research Areas

Pfizer's five core remaining areas of research will be: neuroscience, cardiovascular/metabolic disease, oncology, inflammation/immunology and vaccines. Three other specialized research units will focus on pain, sensory disorders and biosimilars. At the same time, the company will exit several areas of research that it now views as greater risk or less productive, including allergy/respiratory, urology, internal medicine and tissue repair. The company will consider divesting, partnering or spinning out research assets that are deemed to be non-priorities.

Under a research portfolio reprioritization program developed by former management - including Kindler and then R&D President Martin Mackay - Pfizer already pared down its therapeutic focus and announced plans to exit most cardiovascular R&D in 2008. The company's core areas then were oncology, pain, immunology/inflammation, diabetes/obesity, Alzheimer's disease and schizophrenia (Also see "Pfizer Plots Major Phase III Push" - Pink Sheet, 5 Mar, 2008.). The company's current cardiovascular focus is more around diabetes and its related complications, the company said.

"We will do fewer, more well-funded efforts," R&D President Mikael Dolsten said in a follow-up interview. Each of the research units will operate as a separate unit led by a chief scientific officer, with close interface with colleagues in the business units, he added.

"The real new step we are taking and what I really find refreshing is the way we put science and business as equal partners around the table," Dolsten said. "It is a decision process where the R&D organization, as well as the commercial organization, has a major say when we make big investments." The research group will take the lead on drug development up through proof of concept, at which point a drug candidate will go through a rigorous scientific assessment by the research group and a return-on-investment evaluation by the commercial group before it moves forward into late-stage development, he added.

Pfizer separately will form external research groups to focus on other areas of unmet medical need that may be viewed as more challenging or outside Pfizer's area of expertise. These groups will include a small internal task force to identify partnering opportunities, Dolsten said, citing potential research areas like women's health, retinal disease, genetic diseases and rare diseases.

Job Cuts In Sandwich, U.K., And Groton, Conn.

In connection with the research changes, Pfizer announced it will close its research facility in Sandwich, U.K., and reduce the number of employees at its Groton, Conn., research campus, the company's largest research site. The Sandwich facility employs 2,400, and while Pfizer said it hopes to transfer "several hundred" positions to other Pfizer sites or external partners, many positions will be eliminated.

The current research focus in Sandwich is in areas that are now less of a priority, including allergy/respiratory, with a focus on inhaled drugs, as well as internal medicine, urology, virology and renal disease, Dolsten said. "We don't currently have a significant part of our mid- to late-stage portfolio that actually comes from Sandwich," he added. However, he said Pfizer remains committed to having a presence in the U.K. and will move pain research, currently done in Sandwich, to its Cambridge, U.K. site to create "more of a biotech pain unit there."

In Groton, Pfizer expects to eliminate about 25% of the 4,500 positions, though the company plans to move some of those jobs to Cambridge, Boston, where Pfizer is looking to develop one of several research "hubs." Other hubs include San Francisco, New York and Cambridge, U.K.

Pfizer, like its peers, plans to outsource more R&D. The company is on the cusp of signing "major strategic partnerships" with contract research organizations in clinical operations or pharmaceutical sciences, Dolsten said. The Groton site will be an "excellence center for discovery and development sciences," but also will become the main operating center for working with CROs, he added.

In a move aimed at appeasing disgruntled investors, Pfizer separately announced that the board of directors has approved a share repurchase program for up to $5 billion, increasing the total current authorization to $9 billion. The company said it plans to repurchase $5 billion in common stock in 2011.

As a result of the R&D cuts and the share repurchases, the company said it is more certain it will meet its 2012 adjusted diluted EPS target of between $2.25 and $2.35 per share. However, the company lowered its 2012 revenue target to between $63 billion and $65.5 billion from a previous target of $65.2 and $67.7 billion.

The lower revenue estimate isn't altogether surprising. Analysts have long questioned how Pfizer would hit targets it laid out when it announced the Wyeth acquisition, given that it will lose its top-seller Lipitor to generic competition in the U.S. this year. The company lowered its 2012 revenue forecast twice in 2010. Pfizer originally had targeted $70 billion in revenues when it announced the Wyeth merger.

News that Pfizer will maintain its dividend, buyback shares and meet its 2012 EPS target - as well as assurance from Read that Pfizer will review all the elements of its business - was welcomed by investors. The stock rallied on the earnings report, closing the day up 5% to $19.22.

"This is very positive; the CEO is listening to investors," Goldman Sachs analyst Jami Rubin commented in an interview.

"New CEO Ian Read seem to be making strides early on towards doing what investors want, which is positive," Bernstein Research & Co. analyst Tim Anderson said in a same-day research note.

-Jessica Merrill ([email protected])