Internet Mini Case #5

Internet Mini Case #5

Pfizer, Inc.

Maryanne M. Rouse

A research-based, global pharmaceutical company, Pfizer, Inc. (PFE) was founded as a chemical products firm in 1849 by Charles Pfizer and Charles Earhart. The company grew rapidly during the Civil War, providing cream of tartar, tartaric acid, iodine, chloroform, and camphor to Union forces. After perfecting the fermentation of citric acid from imported lemon and lime concentrates in the early 1880s, Pfizer expanded to Chicago in 1882. During the 20th century, the company grew both internally and via acquisition, consolidating its pharmaceutical base and diversifying into consumer health care, animal health, confectionary products, shaving products, and pond and aquarium supplies. For reporting purposes, Pfizer dividedits operations into two segments: pharmaceutical and consumer products. Fiscal year 2001 sales were $32.259 billion, with 91% from human and animal health products and 9% from confectionary products, shaving products, and pond and aquarium products:

Pharmaceuticals

Human pharmaceuticals79.0%

Animal health care 4.5

Total pharmaceuticals83.5%

______

This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of SouthFlorida. Copyright © 2005 by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without the written permission of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to the publisher, Prentice Hall, for the books, Strategic Management and Business Policy – 10th and 11th Editions (and the International version of this book) and Cases in Strategic Management and Business Policy – 10th Edition by the copyright holder, Maryanne M. Rouse. This case was edited for SMBP and Cases in SMBP – 10th Edition. The copyright holder is solely responsible for case content. Any other publication of the case (translation, any form of electronics or other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless Maryanne M. Rouse has granted an additional written reprint permission.

Consumer Products

Consumer healthcare 7.5%

Confectionary 6.2

Shaving products 2.0

Tetra pond and aquarium .8

Total Consumer Products16.5

Total sales100.0%

Quarterly results for the first three quarters of 2002 showed little change in composition of revenue. Pfizer earned revenue in excess of $500 million in each of seven countries outside the United States in 2001. Sales by geographic segment for the fiscal years 1999-2001 were:

United All

StatesJapanOthersTotal

2001$19,932$2,102 $10,225 $32,259

2000 17,753 2,062 9,540 29,355

1999 16,464 1,716 8,986 27,166

Human Pharmaceuticals

With the acquisition of rival pharmaceutical firm Warner-Lambert in June 2000, driven by Pfizer’s desire to gain control of full profits from sales of Lipitor, Pfizer became the world’s largest ethical pharmaceutical (prescription drug) company, as measured by sales. Pfizer’s impressive product portfolio, which included 5 of the 10 most prescribed medicines in the United States in 2001, was also fairly well protected from generic competition over the next five years. The company had a presence in nine drug segments:

• Cardiovascular: This segment included Lipitor, the world’s largest-selling cholesterol-lowering agent (sales of $6.4 billion in 2001); and anti-hypertensives such as Norvasc (sales of $3.6 billion), Cardura ($552 million), and Accupril ($605 million).

• Infectious Diseases: This segment comprised Zithromax broad-spectrum quinilone antibiotic ($1.5 billion); anti-fungals Diflucan ($1.1 billion) and Vfend; and protease inhibitor Viracept for the treatment of HIV/AIDS ($364 million).

• Central Nervous System: This segment included Zoloft anti-depressant ($2.4 billion); Neurotonin anti-convulsant ($1.8 billion); Aricept, the world’s leading medicine for Alzheimer’s, which was co-promoted with Eisai Co. Ltd; and Geodon, a new treatment for schizophrenia ($150 million).

• Arthritis: This segment included Celebrex and Bextra, co-promoted with Pharmacia.

• Urogenital: This segment sold Viagra ($1.5 billion).

• Allergy: This segment sold Zyrtec, the most widely used second-generation antihistamine worldwide ($990 million).

• Diabetes: This segment featured Glucotrol XL and Exubera.

• Respiratory Diseases: This segment included Spiriva, a one-day inhaled treatment for congestive obstructive pulmonary disorder, then in an advanced stage of regulatory review in Europe.

• Metabolic Disorders: This segment sold Lasfoxifene for osteoporosis, then in Phase 2 studies in the United States.

Pfizer had built the world’s largest biomedical research and development organization to support its commitment to innovation, the major driver of the company’s remarkable growth. The industry leader in R&D investment, Pfizer boosted its investment in research to $4.87 billion in 2001, a 347% increase over the past 10 years, with plans to increase research investment to over $5 billion in 2002. The Warner-Lambert acquisition allowed Pfizer to build on its significant advantage in research both by adding thousands of researchers and by providing expertise in several new areas: Pfizer’s library of compounds effectively doubled, substantially increasing the likelihood of drug discovery. At the beginning of 2002, the company had 94 new compounds in development, together with 68 projects devoted to expanding the uses of current drugs, for a total of 162 ongoing projects. Pfizer’s strong research focus positioned the company to successfully respond to patent expiration and challenges from generics by extending the life of existing products via formula or compounding modifications or conversion to over-the-counter (OTC) products.

Pfizer’s focus on R&D was matched by an equally strong emphasis on marketing. The company promoted its human pharmaceutical products to health care providers, including doctors, nurse practitioners, physician assistants, pharmacists, pharmacy benefits managers (PBMs), and managed care organizations (MCOs). Pfizer also promoted its products directly to consumers in the United States via direct-to-consumer (DTC) print and television advertising. Pfizer had responded to the Food and Drug Administration’s (FDA’s) 1997 decision to loosen restrictions on DTC advertising of prescription drugs by increasing DTC promotional spending each year.

Prescription pharmaceutical products in the United States were sold principally to wholesalers but were also sold directly to retailers, hospitals, and clinics. During 2001, sales to Pfizer’s three largest pharmaceutical wholesalers as a percentage of revenue were:

McKesson, Inc.14.6%

Cardinal Health Care 13.4%

AmerisourceBergen Corporation13.0%

Pfizer’s strong marketing and sales operations had enabled the company to become the partner of choice for the marketing of innovative products developed by others. Pfizer had been extremely skilled in creating alliances with other pharmaceutical companies via co-promotion agreements. Through co-promotion and licensing agreements, Pfizer had promoted and marketed such highly promising products as Celebrex, Bextra, and Aricept with alliance partners by providing cash, staff, and other resources to further develop, market, promote, and sell the products in exchange for a share of revenues.

Other alliances included a partnership with IBM and Microsoft to create Amicore, an independent company that was developing practice management systems; and a chronic disease management program developed with the State of Florida’s Agency for Health Care Administration.

Pharmaceutical revenue increased 13% in 2001, to $2.6 billion, reflecting market share growth in both proprietary and alliance products. Revenues of $8.7 billion for the third quarter of 2002 were up 12% over the same quarter in 2001. Eleven products - Lipitor, Norvasc, Neurotinin, Viagra, Zoloft, Celebrex, Bextra, Geodon, Aricept, Zyrtec, and Diflucan - representing 82% of Pfizer’s human pharmaceutical revenues, grew a combined 17%. Reported third quarter 2002 net income for the company as a whole increased 12% over the same quarter in 2001. Complete financial information (annual reports, 10K forms) is available from the company’s website, or

Estimated market shares of the 10 largest global pharmaceutical companies at the end of 2001 were:

RankingCompanyEstimated Market Share (%)

1Pfizer8.2

2GlaxoSmithKline6.9

3Merck & Co.5.4

4Pharmacia5.3

5AstraZeneca4.4

6BMS4.1

7Novartis3.9

8Johnson & Johnson3.8

9Aventis3.7

10 Wyeth (AHP)3.5

Animal Health

Pfizer’s animal health unit marketed one of the largest-selling and broadest product lines in its field, selling more than 240 livestock and companion animal products directly to veterinarians, livestock producers, and distributors. Principal products included Rimadyl, for canine arthritis; Revolution, the first FDA-approved topical medicine to kill fleas and ticks and control earmites, hookworm, and roundworm in dogs and cats; and Dectomax, a treatment for internal and external cattle parasites. Other products included vaccines and antibiotics. In 1995, Pfizer acquired SmithKline Beecham’s animal health business, the largest acquisition in Pfizer’s history to that point, and one that enabled Pfizer to become a major competitor in the animal health segment. Animal health sales in third quarter 2002 increased 10% to $280 million, compared to the same period in 2001. This solid performance was led by the strong growth of companion-animal products Revolution, Rimadyl, and Clavamox/Synulox and of Pfizer’s livestock medicine RespiSure/Stellamune.

Consumer Health Care

Pfizer Consumer Health Care (CHC) was one of the world’s largest providers of OTC medicines. CHC’s largest product line was Listerine, the best-selling therapeutic mouthwash in the world. Other well-known brands included Ben-Gay and Desitin ointments, Sudafed and Benadryl cold medications, Lubriderm, Neosporin, Rolaids, Efferdent, and Unisom sleep aids. Pfizer expected CHC to serve as a vehicle to extend the commercial life of medicines going off patent, whether Pfizer drugs or those of other pharmaceutical companies.

Confectionary Products

The Adams confectionary business, acquired by Warner-Lambert in 1962, became a Pfizer business segment in the Warner-Lambert acquisition. Headquartered in Parsippany, New Jersey,Adams was one of the world’s largest providers of confectionary products, with such brands as Halls, Trident, Dentyne, Chiclets, Certs, Clorets, Bubbaloo, and Bubblicious. Adams distributed confectionary products in more than 70 countries. In late June 2002, Pfizer announced that it would explore strategic options for the Adams confectionary business and the Schick-Wilkinson Sword shaving products business, including possible sale of both businesses. The company reportedly received bids from Cadbury Schweppes PLC and Nestle SA for its Adams confectionary business during the 2002 third quarter; however, no definitive agreement for sale had been reached as of late 2002.

Shaving Products

Pfizer entered the shaving products business with its 2000 acquisition of Warner-Lambert. This division manufactured and marketed Schick and Wilkinson Sword razors, which collectively held the number two market-share position worldwide. While there had been some expressions of interest from competitors in acquiring this unit, as of early November 2002, Pfizer had received no firm offers.

Tetra

Tetra was the world’s leading provider of products for the ornamental fish food market, including TetraMin fish foods and other fish care products. Tetra was the only brand name synonymous with ornamental fish-keeping. Founded by Dr. Ulrich Bensch in Mele, Germany, Tetra pioneered the development of flake fish foods. Dr. Bensch sold his company, Tetra Werke, to Warner-Lambert in 1974. Now a division of Pfizer and headquartered in MorrisPlains, New Jersey, Tetra had approximately 700 employees and contributed $181 million to Pfizer’s $32.36 billion 2001 revenue. In a further move to remain focused on its core pharmaceutical businesses, Pfizer announced on November 6, 2002, that it would sell its Tetra aquarium and pond supply business to the Triton Fund, a private equity European investment fund, for $238.5 million. Acquisition of diversified pharmaceutical companies followed by divestiture of non-core businesses was not a new strategy for Pfizer; the company had divested 15 divisions over the previous 10 years that did not fit with the company’s mission and strategies. For example, Pfizer divested the Food Science Group, a segment that manufactured food additives, in 1996 and sold the Medical Technology Group in 1998 in order to exit the medical devices business.

The Pharmacia Acquisition

On July 15, 2002, Pfizer announced that it would acquire rival and marketing partner Pharmacia in a tax-free stock-for-stock transaction valued at $60 billion. Already the leading pharmaceutical company in the United States, Pfizer with Pharmacia would move from fourth to first in Europe; from third to first in Japan; and from fifth to first in Latin America in pharmaceutical sales. The acquisition was expected to enhance Pfizer’s already formidable scale economies, strengthen Pfizer’s research capability (the combined research spending of the two companies was expected to exceed $7 billion per year), and expand the company’s presence in major therapeutic categories. One of those categories was cancer drugs, one of Pfizer’s few weaknesses; Pharmacia made the chemotherapy treatment Camptosar. Pfizer and Pharmacia were already alliance partners that had worked together effectively to market the COX-2 products Celebrex and Bextra.

The deal would give Pfizer an estimated 14% of the U.S. prescription drug market and 14 number one drugs. Pharmacia, which started as a Sweden-based company, merged with U.S. drugmaker Upjohn in 1995 to form Pharmacia & Upjohn. After the Monsanto merger in 2000, the company changed its name to Pharmacia. The Pfizer acquisition did not include Pharmacia’s 84% ownership interest in Monsanto, which would be spun off separately to Pharmacia shareholders.

Problems and Challenges

Pfizer was the subject of a number of investigations, lawsuits, and negative press incidents:

• On November 6, 2002, the United Kingdom’s Appeal Court upheld government restrictions on the supply of the anti-impotence drug Viagra to patients of the National Health Service (NHS). Pfizer had appealed a High Court decision endorsing the restrictions, arguing that it was illegal for U.K. Health Secretary Alan Milburn to keep Viagra on a list of drugs that doctors could prescribe only in a clearly defined circumstance, which, for Viagra, would be impotence. Milburn said that the restricted supply of Viagra cost the cash-strapped NHS ₤25 million per year; an unrestricted supply would increase the cost to ₤125 million. The government noted that if Viagra were made freely available, funds would have to be diverted from the treatment of other conditions such as cancer, heart disease, and mental illness.

• In 2002, Attorneys General in 47 states were investigating whether the company illegally marketed the epilepsy drug Neurotonin. Both civil lawsuits and separate criminal investigations alleged that Parke-Davis and its parent company, Warner-Lambert, illegally influenced and paid kickbacks to doctors to prescribe Neurotonin for conditions for which the drug was not approved, going so far as to have advertising agency employees make joint sales calls with company sales representatives. According to the suits, about three-quarters of Neurotonin prescriptions nationally were written for off-label uses, pushing sales to $1.75billion in 2001. Pfizer had declined to comment but had denied the allegations in the past.

• On October 29, 2002, Pfizer agreed to pay $49 million to settle allegations that the company defrauded the Medicaid health care program by overcharging the government for the cholesterol drug Lipitor.
• In 2002, Pfizer was the target of over 2,000 suits involving Rezulin, a diabetes drug developed by Sankyo in Japan and by Warner-Lambert.

• In 2002, the company was involved in patent litigation with generic drug manufacturers for a number of its marquee pharmaceuticals, including Zoloft, Diflucan, Neurotonin, Procardia XL, and Celebrex.

• Thirty Nigerian families sued Pfizer in U.S. Federal Court in August 2001 for damages in what the suit claimed was an unethical clinical trial of the antibiotic Trovan conducted on children with bacterial meningitis. Pfizer had a mixed record of philanthropy in Africa. The company had been widely praised for its donation of millions of doses of Zithromax to treat trachoma, a common cause of blindness; however, Pfizer’s donation of Diflucan to South Africa to treat some AIDS-related infections had left the company open to criticism from those who charged that it both placed too many restrictions on how the drug was to be used and failed in its moral obligation to lower the price of the drug overall.

The Industry

In the United States, the largest segment of the global pharmaceutical market, demographic trends, including the baby boom population bulge and longer average life spans, were driving industry growth. Although approximately 12% of the U.S. population was over 65 years of age, in 2002 over 33% of all U.S. prescriptions were written for those over 65. Patients generally considered prescription medicines necessary purchases, which, together with a third-party payment system, tended to reduce the price elasticity of demand.

Despite near-term uncertainties with respect to pricing and patent expirations, the pharmaceutical industry was still one of the healthiest and widest-margin industries in the United States. Continuing consolidation, driven in part by the need to develop a strong pipeline of potentially profitable drugs, had intensified competition both within the United States and globally. U.S. prospects for the longer term were enhanced by demographic growth in the elderly segment of the population (accounting for about one-third of industry sales), as well as by new therapeutic products resulting from discoveries in genomics and biotechnology. However, drugs generating over $40 billion of industrywide sales in 2001 had lost or were going to lose patent protection over the next three years. The flood of patent expirations offered major opportunities for generics manufacturers, especially for those obtaining 180 days of “first to file” marketing exclusivity.

On the regulatory front, the FDA had become much tougher on new drug approvals: Regulatory compliance was costly both in out-of-pocket application, establishment, and product fees and in time required to gain approval. Major new drug therapies took an average of 14 years to develop, at an estimated cost of $500 million. Only about 1 applicant in 20 made it through Phase 3 trials to FDA approval. The FDA was also cracking down on drug manufacturing, with some plants closed as a result of quality problems.

Four key developments were expected to act as a ceiling on profits for pharmaceutical firms: (1) managed care plan buyers, who accounted for 70.4% of prescription drug purchases, had made drug cost containment a priority; (2) the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was being enacted; (3) states had become very aggressive in pushing for new legislation aimed at obtaining greater drug discounts for Medicaid and other state-run programs;and (4) prescription drugs were increasingly being purchased from outside the United States, especially purchases from Canada and Mexico and via the Internet. Many HMOs were using a three-tiered copay system to discourage the use of expensive drugs and encourage the use of generics.