When Ian Read, an accountant and company lifer, took over as Pfizer’s chief executive in December 2010, the drug firm–the world’s largest–was facing the impending patent expiration of Lipitor, the bestselling drug ever made, and the utter failure of one of the most lavishly funded research laboratories on the planet to develop much of anything. The stock was suffering, and Read’s predecessor–Jeffrey Kindler, a bearlike lawyer hired from McDonald’s–had just spent $68 billion to buy rival drugmaker Wyeth in a Hail Mary strategy shift. Now Read had to make it work.
“I’m not going to talk about mission or vision,” Read recalls telling employees back then. “This is critical. We’ve got to talk about imperatives.” Namely, cutting costs, pleasing shareholders and fixing the company’s R&D operation (it had spent $40 billion over five years to produce just four drugs, which today have combined annual sales of about $2 billion). Read cut head count from 130,000 to a low of 80,000 at the beginning of this year, raised $32 billion by selling off extraneous divisions and got seven drugs approved. He made Wall Street salivate over the idea of breaking Pfizer into two companies, a slower-growing business that sells older medicines and a hot one that focuses on breakthroughs. Though the paring down cut sales 27% to $50 billion, annual net income has increased 10% to $9 billion. The market has applauded: Pfizer shares are up 94% over Read’s tenure, 23% more than the Arca pharmaceutical index and more than double the gains of heavyweight rivals like Merck and AstraZeneca.
Restoring the public’s shaken trust in pharma was one of Read’s imperatives, too, and he thinks he’s “done what’s necessary.” Democratic presidential candidates Hillary Clinton and Bernie Sanders disagree, and have made outrageously expensive medications a campaign issue. A callow 32-year-old former hedge fund manager, Martin Shkreli, made things far worse by jacking up the price of a 62-year-old lifesaving drug, Daraprim, by 5,000% and instantly became the most hated man in America. Clinton tweeted about him to promote her own plan to lower drug prices.
Now Read, with his calculating mind, must get through the public’s rage over six-figure price tags for breakthrough drugs and yet keep Pfizer’s pricing power more or less intact. Doing so is absolutely critical: 34% of Pfizer’s revenue growth over the past three years has come from increasing prices on existing drugs, according to SSR, a Stamford, Conn.-based consulting firm. New medicines, especially for cancer, are selling for $100,000-plus–prices that were unimaginable five years ago.
Read was born 62 years ago in Scotland but grew up in Rhodesia, where his father worked as a carpenter and his mother was a nurse. He received a bachelor’s degree in chemical engineering from Imperial College London in 1974 and became a chartered accountant in 1978. That same year he joined Pfizer as an auditor in Latin America and worked his way up to run operations in Chile, then Brazil and, by 2002, all of Europe and Canada. When Kindler, who had joined Pfizer as general counsel in 2002, became CEO in 2006, Read was elevated to run worldwide marketing. As Kindler stumbled, the board turned to the savvy and experienced accountant.
Read’s views on drug prices were shaped by his decades inside Pfizer’s marketing machine. He points to an analysis showing that Lipitor and cholesterol-lowering drugs like it generated $1.3 trillion in economic benefits (at a cost of just $305 billion) between 1987 and 2008 by preventing heart attacks and strokes. A similar analysis shows that cancer drugs generated $1.9 trillion in benefits between 1988 and 2000, with drug companies pocketing no more than 19% of that.
“What’s sad is this,” Read insists. “When you look at the totality of the health care system, everybody says, ‘Oh, my God, we can’t afford what we’re spending on health care.’ But nobody looks on the other side of the ledger.”
Read insists drug companies don’t make undue profits. He points out that, in terms of return on capital or return on assets, pharma is just average, far below packaged goods and consumer products. Many investors think drug R&D is a worse financial investment than an index fund. From 1997 to 2011 Pfizer spent $7.7 billion on R&D for every new drug that reached the market.
That’s part of the reason the drug industry has been in a decades-long process of consolidation, in which Pfizer has been the biggest acquirer. It got Lipitor from its $110 billion purchase of Warner-Lambert in 2000 and arthritis pill Celebrex from the $60 billion purchase of Pharmacia in 2003. Mergers disrupt research, and Kindler was reluctant to do another. But as Pfizer’s drugs failed and shares approached 15-year lows, he bought Wyeth in January 2009 for $68 billion.
Kindler was gone 23 months later, and Read was left to make the deal work. He found that some basic processes were broken. One drug application was so badly put together that the FDA refused to review it–a rarity for a big pharma company and an embarrassing first for Pfizer.
“Who’s owning this?” he demanded of the team in charge of the effort. No one spoke up.
“Everybody around this table knew there was a substandard application, yet no one was prepared to speak up.”
His solution was emblematically Pfizer: Hand out to every employee a gold coin that says “OWNIT!” on one side and “Straight Talk” on the other. Put the coin down, “Straight Talk” side up, and the company says it will protect you when you tell your boss he’s wrong. For a company drowning in Orwellian corporate speak (Read’s effort to improve the labs is called “fixing the innovative core,” and one round of layoffs was called “Adapting to Scale”), the ham-fisted gimmick was a way to create accountability.
Wall Street didn’t care about the coin, of course. Instead, investors got excited when, on his first earnings call, Read said he would explore how the company’s various businesses can create the most value, “be it inside or outside Pfizer.”
Read made good on the hint. He sold Pfizer’s baby formula business to Nestlé in April 2012 for $12 billion and in February 2013 spun off its animal-health division, renamed Zoetis, as a $21 billion (market cap) company, generating $17 billion for Pfizer shareholders. The real exciting idea, though, is splitting Pfizer in two, separating new drugs from older ones (like Lipitor) that have lost patent protection but still generate billions of dollars in sales. Investors could choose risky, fast growth or safer, steady sales. A decision is expected by the end of 2016.
But then, last year, Read decided to make his own megabid, offering $100 billion for London’s AstraZeneca in a hostile deal. Between 70% and 90% of Pfizer’s cash is trapped outside the U.S., and the company can’t move it back without paying U.S. taxes. Buying AstraZeneca would have used some of that cash and moved Pfizer’s tax domicile to the United Kingdom, a tax-avoiding strategy called an inversion. “It was a way of improving our capital allocation by getting Pfizer’s earnings stream into a competitive tax environment,” Read says.
The proposal generated a firestorm of controversy in Congress and the British government. Investors were lukewarm. Read walked.
There are signs that Read has improved Pfizer’s R&D. Take Ibrance, a new breast cancer drug that delays tumor growth. UCLA’s Dennis Slamon, who ran a study of Ibrance, said the results were among “the most impressive” he had ever seen. But Wall Street analysts, scarred by years of disappointing lab results, countered that approval was “unlikely.” The FDA approved Ibrance in February.
A bigger question is whether Ibrance is too expensive. It costs $118,000 per patient per year, and other cancer drugs, like Merck’s Keytruda and Amgen’s Blincyto, cost more. One drug combination from Bristol-Myers Squibb for melanoma can cost $256,000 per patient.
“I understand the physicians saying, ‘Look, these prices are too high,’ ” Read says. “ It’s because their patients can’t get access. That is an insurance issue.”
But even though Read sees negotiations with insurers as “arduous,” there’s really little an insurer–or Medicare–can do to bring down the price of an effective cancer drug. Insurers have three options: pay up, pass the cost on to patients or not pay at all. Read may be right to insist that insurance should always pay the full cost of cancer meds–that’s the point of insurance, after all–but there are no effective market forces acting to control prices .
Read has another pricing problem: Pfizer’s dependence, shared with other large drug companies, on raising the prices of older medicines. Over the past three years Pfizer has increased the net price of Viagra by 57%, of Lyrica (for chronic pain) by 51% and of hormone replacement therapy Premarin by 41%, according to SSR. Pfizer is not alone, either. AbbVie got 112% of its revenue growth from price increases and Bristol-Myers Squibb 47%.
But this practice may already be coming to an end. SSR analyst Richard Evans says that over the past year the drug industry’s net price increases have been almost flat. Pfizer points out that its overall sales are dropping and that middle-tier health plans under the Affordable Care Act often leave patients paying half their drug costs, which, again, Pfizer says is the real problem.
Polls show that 83% of Americans would like Medicare to be able to negotiate drug prices, but that would require agreement from both parties, which is unlikely. Political gridlock–a drug giant’s best friend.
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