Why Pfizer Is So Hot may 11-98
pathfinder.com
With one of the richest product pipelines in the
Fortune 500, Pfizer is on a roll that will continue for
years to come. It may even upstage Merck as the
drug industry's premier player.
David Stipp
ne day last March, after rivals Glaxo
Wellcome, American Home
Products, and others announced they
were exploring multibillion-dollar mergers,
Pfizer CEO William Steere went to the
fitness center in the basement of his
company's Manhattan headquarters to work
out. "What's the hot rumor today?" he asked
a trainer. "Everybody is terrified we're going
to do a merger," the trainer answered.
Returning to his office, Steere dashed off a companywide memo with
a blunt message: That rumor had "no basis in fact."
Merger, schmerger--Pfizer has better things to do. Consider the basic
reason for the merger mania: the expiration of patents on key drugs.
Nothing keeps pharmaceuticals executives awake at night like the
prospect of cheap generic substitutes flooding their most profitable
niches. After U.S. patents expired on its flagship antiulcer drug, Glaxo
Wellcome (itself the product of a merger) proposed combining with
SmithKline Beecham (another merger product); the monster deal
spontaneously aborted like a four-headed calf.
Pfizer has little cause to fret. In the past few years it has expanded its
drug pipeline faster independently than rivals have expanded theirs by
merging. Steere, a guarded man not given to audacious words, told
shareholders at Pfizer's annual meeting last year that the company
aims to be the industry's premier player by 2002. It wasn't hype, just
extrapolation: By the company's reckoning, since 1991, when Steere
was named CEO, it has risen from No. 13 to No. 4 in worldwide
prescription-drug sales. Wall Street seems convinced. Says Goldman
Sachs analyst Prem Lachman: "Pfizer is already perceived as the No.
1 company." Its lofty P/E ratio suggests many investors agree--at a
recent $99 a share, Pfizer stock traded at 48 times estimated 1998
earnings, vs. about 30 for U.S. drug companies on average.
One reason is Viagra, the first FDA-approved pill to treat impotence.
Okayed by the government in late March, Pfizer's erection booster
has been hailed in media reports as everything from "love potion No.
9" to the inciter of a second sexual revolution--not to mention the
probable biggest-selling drug ever. Propelled by such buzz, Pfizer's
market value has more than doubled in the past year, to $135
billion--the company is gaining on No. 1 Merck, whose market value
rose more than 60% over the same period, to $163 billion.
It will be difficult for Viagra to live up to
expectations raised by all the stories
about its Lazarus-like effects. Even if it
disappoints somewhat, Pfizer's place in
health heaven is set for years to come.
Consider a few of its "unsexy" drugs:
Norvasc, the best-selling hypertension
drug with sales last year of $2.2 billion;
Zoloft, an antidepressant expected to
reach $2 billion in sales next year; and
Trovan, an antibiotic the FDA recently
approved to treat 14 different kinds of
infections, the most indications ever for a new drug. In the next 18
months, Pfizer expects to launch major drugs to treat schizophrenia,
irregular heartbeat, and migraine. The company boasts some 60 drugs
in earlier stages of development, for conditions from diabetes to
anxiety.
That would be considered a chock-full pipeline at most companies.
But Pfizer is adding to it aggressively via partnerships. "What really
distinguishes the company," says Stelios Papadopoulos, head of Paine
Webber's health-care investment-banking group, "is that it's become
the co-marketer of choice"--the partner preferred by the industry's
smaller players hoping to realize the potential of their own
blockbusters. Seeking to promote other companies' drugs used to be a
sign of a pipeline weakness, adds J.P. Morgan analyst Carl Seiden;
"Pfizer is doing it out of strength as part of its growth strategy. That's
novel."
The strategy emerged last year when Pfizer co-launched Lipitor, a
cholesterol-lowering pill, with Warner-Lambert. Pfizer's potent sales
force, ranked No. 1 in physician surveys, helped the drug smash the
industry's record for first-year sales. Worth $865 million in 1997,
Lipitor blew by Merck's established drug, Zocor, to lead the
anticholesterol niche in the U.S. Last year, Pfizer also co-launched
the first significant drug to offset symptoms of Alzheimer's disease;
called Aricept, it was developed by Japan's Eisai and became the
leading medicine for the disease within a month. This spring, Pfizer
landed the rights to co-market G.D. Searle's Celebra, expected to be
the first significant new arthritis medicine in more than a decade.
Analysts predict Pfizer's share of revenues from the three deals will
exceed Viagra's sales, which are expected to top $2 billion a year by
2001.
It is the kind of growth legends are made of: "Some of my clients
refer to Pfizer as the best company in the S&P 500," J.P. Morgan's
Seiden says enthusiastically. Art McKee, who tracks drug companies
at Scott-Levin, a Newtown, Pa., health-care consultant, adds: "We get
calls daily from other companies asking how Pfizer does this or that."
Few saw it coming a decade ago. "Pfizer was one of the ugly drug
companies in the 1980s," says Salomon Smith Barney analyst
Christina Heuer. A pipeline gap loomed--its flagship drug, Feldene for
arthritis, was due to go off patent in 1992. A possible successor,
tenidap, wouldn't be ready to submit to the FDA until the mid-1990s.
But having survived that dry spell, Pfizer now has few drugs nearing
the end of their patented lives, notes Heuer. Meanwhile, at rivals like
Glaxo and Merck, companies that were on a tear in the 1980s, major
drugs are in their twilight years. "For Pfizer's peers, the product game
is to replace old blockbusters," says J.P. Morgan's Seiden.
"Everything for Pfizer is pure growth."
If Pfizer's success involves luck,
it's not the dumb kind. Steere's
predecessor, a former Kennedy
Administration whiz kid named
Edmund Pratt, spent heavily on
research during the 1980s--a
strategy that uglified earnings.
So as Feldene went off patent,
beauties like Norvasc, the
hypertension drug, began
emerging from Pfizer's labs.
Steere, known for his
laser-intense focus, completed
the transformation by shedding
noncore businesses, consistently
plowing some 15% of sales into
R&D (one of the industry's
highest levels) and beefing up
Pfizer's sales force--at 14,500, it's bigger than Merck's, according to
research by Cowen & Co. in Boston.
Steere made the latter move when industry experts were predicting
that big sales forces were passe for drug companies--instead, the
firms should buy drug distribution companies to funnel medicines to
HMOs. "We were excoriated on Wall Street," he says. Now analysts
praise the move for having positioned Pfizer to win co-marketing
rights to hot new drugs. Steere argues that the benefits of truly novel
medicines, the stuff of blockbusters, often don't register with busy
doctors until they get the story from well-versed sales reps. He should
know: Steere, a former detail man who joined Pfizer in 1959 and rose
through its marketing ranks, helped spearhead Feldene's rise to
blockbuster status.
He's also known for smart luck in the R&D game. Viagra, originally
pursued as a heart drug, was unexpectedly found in 1992 to boost
erections in clinical tests. Soon after, Steere shifted into high gear the
program to develop it for impotence. "Viagra crystallized some things
I'd been thinking about," he says. "It struck me that a quality-of-life
drug for aging would be a real winner. Look at the volume in
cosmetics, which are nostrums that don't really do anything." The
move gave Pfizer a big lead in the high-stakes race to develop
impotence pills.
As Viagra shows, Pfizer's R&D is built for speed. Over the past
decade, the company has emerged as a leader in automated rapid
screening of compounds for useful biological activity. The technique
involves using robot arms to dispense thousands of chemicals from a
"library" of potential drugs into test tubes containing, say, a protein that
disease bacteria need to multiply. The test-tube contents are
concocted in such a way that if a compound messes up the protein, a
telltale color change occurs--voil…, a prototype antibiotic has been
found.
"Speed is everything in this industry," says Steere. Rival drugmakers
can now quickly replicate one another's breakthroughs--even improve
on them--by reading patent applications and then applying tools such
as the high-speed screening method. To stay in the game, they must
continually invest in such fast-evolving technologies. Meanwhile,
they're finding it harder to recover costs because of the shortened
time between generations of new drugs. It sounds like the usual
high-tech race, but it's worse--Intel doesn't have to worry that the
FDA will reject one of its chips or that scores of people may die if it
fails to detect a subtle bug in its logic circuits.
Pfizer's hard-driving, pragmatic style--which shaped Steere and is
now being shaped by him--has helped it cope better than many rivals
with the dizzying changes. In the past, "we struggled with an
inferiority complex," says Alan Proctor, a Pfizer research manager.
"The 'we try harder' Avis attitude is now a hallmark of our mentality."
Pfizer researchers pride themselves on being
almost ruthlessly focused on getting practical
results. "It takes a new Ph.D. two or three
years of intensive learning and growth here
to get used to our mindset," says Proctor,
adding dryly, "We try to help those who can't
make the transition go back to academia."
Says George Milne, head of Pfizer's central
research unit in Groton, Conn.: "We like to
say that blockbusters aren't just discovered.
They're built."
The research teams measure their progress with "step charts" that
show how many promising compounds should be in hand at each
phase of a drug's development in order to cover the expected attrition
rate--typically, only one of about seven million screened compounds
has the right stuff to make it to market. The charts give Pfizer an
edge in dealing with one of the industry's thorniest problems: killing
projects that don't measure up. After devoting years to a drug,
scientists tend to get as romantic about it as the doting parents of a
toddler. The charts help cut that out. Says Proctor: "We use them as
visuals to ask, 'Look guys, we expected to be this far by now--do we
keep going?' "
The answer may be yes even if the risks are high--Pfizer treats its
pipeline like a portfolio structured with a range of risk-reward ratios.
Diversity is the key: The company pursues drugs for just about every
major disease, deploying lean teams across a wide spectrum. "It's a
run-and-gun philosophy," says Steven Holtzman, chief business officer
of Millennium Pharmaceuticals, a Cambridge, Mass., biotech
company that has worked with Pfizer. "By contrast, Merck tends to
set up for the big shot"--concentrating more resources on individual
projects. "Either way can win."
Both can result in air balls too. When Pfizer finally submitted its
arthritis drug tenidap to the FDA in 1995, the agency rejected it
because of risky side effects, temporarily slowing growth. Pfizer's
earnings per share rose a merely respectable 13% last year, vs. 20%
for Merck and 21% for Eli Lilly. But a revealing 1995 industry survey
suggests that Pfizer is better than most rivals at filling pipeline gaps
after flops: On average, its drug-discovery teams need less than
one-third the industry's average of 190 person-years of work to
advance a compound from conception to clinical trials.
The underdog team spirit may
explain another aspect of
Pfizer's edge: Its science and
marketing sides show little of
the tribal friction that can sap
technological prowess. When
the company's researchers
found themselves in a race with
Japan's Eisai to develop similar
Alzheimer's drugs two years
ago, they opted to drop their
own project so Pfizer could vie
to co-market Eisai's drug. "It
was going to be a dogfight
between drugs that were almost equivalent. We saw that Pfizer, Eisai,
and patients would be best served by a joint venture," says Nicholas
Saccomano, who leads Pfizer's basic research on drugs for brain
diseases.
Pfizer's cohesion also came to the fore with Trovan, its new
broad-spectrum antibiotic. As its research and regulatory groups
pursued approval for an unprecedented number of indications in
massive clinical trials, its marketers geared up for a fast, high-intensity
launch this spring. Says Pfizer clinical researcher Michael Dunne:
"The cost and logistics were daunting. But you could do the math and
see that the up-front investment would pay off big through the life of
the drug."
For all its momentum, can Pfizer really bump mighty Merck from No.
1? After all, Merck has a formidable pipeline, and its prestige makes it
a magnet for topnotch creators. For clues, industry experts are closely
watching Pfizer's new joint venture with Searle: It pits Pfizer against
Merck in a race to dominate one of the most exciting drug categories
to emerge this decade. Called COX-2 inhibitors, the new drugs
promise to block the pain of arthritis without chewing up the digestive
tract's lining--long-term use of painkillers like aspirin often causes
insidious "silent" ulcers, which aren't very painful but pose a risk of
sudden, massive bleeding.
The COX-2 story began in 1971 when British researcher John Vane
found that aspirin works by blocking the body's production of
prostaglandins, chemicals that call forth the harpies of inflammation:
pain, swelling, redness. In Nobel Prize-winning studies, Vane showed
that aspirin inhibits the functioning of cyclo-oxygenase, or COX, an
enzyme that cells need to make prostaglandins. Unfortunately,
prostaglandins have many beneficial roles, such as helping blood to
clot after injuries and protecting the stomach from digesting itself--no
wonder blocking them can perforate the guts.
Around 1990, Philip Needleman at Washington University in St. Louis
and other researchers showed the picture was more complex--COX
has two forms: COX-1, a bodily housekeeping chemical involved in
blood clotting and stomach guarding, and COX-2, a troublemaker
spewed at injury sites to help induce inflammation. Aspirin and similar
drugs like Advil block both forms of COX, hence their dual effects.
Researchers quickly realized a drug that specifically blocks COX-2
would probably have all the benefits of aspirin without its worst side
effects. The COX-2 race was on.
Needleman, who joined Monsanto's G.D. Searle unit in 1989 and is
now the parent's chief scientist, jumped into the lead by scanning the
scientific literature for aspirinlike drugs with relatively low rates of
ulcer problems. He reasoned that such drugs mainly affected COX-2,
hence they would make good starting points to develop selective
blockers of the enzyme. It worked: Searle soon led the race with
Celebra, a COX-2 inhibitor that seems to act much as hoped in
arthritis patients. Studies indicate that COX-2 inhibitors can also lower
the risk of colon cancer, and may even slow the progress of
Alzheimer's--someday millions may take daily doses to ward off major
diseases of aging.
As the race developed, it became clear that Merck was only a few
months behind with a drug called Vioxx. Says Searle CEO Richard
De Schutter: "The prospect of taking on Merck was not pleasing. We
decided we needed a marketing partner, and I wanted a gorilla."
Many companies applied for the job. Having long experience with
arthritis drugs, Pfizer knew just how valuable Celebra could be, so it
sent one of its best minds to lobby for a deal: Steere himself. The
CEO sought out De Schutter at a trade group meeting last fall. "My
initial reaction was somewhat tepid," says De Schutter. Pfizer's own
blockbusters, he figured, might distract it from pushing hard on
Celebra. But Steere had a trump card: He pointed to Pfizer's success
co-marketing Warner-Lambert's Lipitor, which was in the process of
shattering industry sales records. Four months later, Pfizer and Searle
cut a deal.
The partners are scrambling to file an FDA marketing application for
Celebra this summer. They have a special incentive: The agency is
expected to give the drug fast-track review, which could put it on the
market by early next year--before Merck can submit its clinical
results with Vioxx. If that happens, Vioxx may not get fast-track
processing--the FDA is reluctant to grant expedited review to drugs
that are similar to ones already on the market, says Salomon analyst
Heuer. The Pfizer-Searle team could gain an extra six months of
market exclusivity if Merck is denied fast review--"easily worth $500
million," says Heuer. "If Pfizer pulls this off, it would be like Michael
Jordan scoring 55 points in Madison Square Garden. People would be
in awe of such an achievement, and Pfizer could step up and claim to
be the industry leader." Merck declines to comment on the fast-track
issue. It plans to submit Vioxx to the FDA by late this year.
It's too early to say who will win the fast-break contest. But here's a
thought: Pfizer may not be Michael Jordan yet, but with its highly
focused, quick-as-a-cat style, it's an interesting bet.
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