Pfizer Plans a Revamp
And $4 Billion in Cost Cuts

(See Corrections & Amplifications item below.)

The array of challenges facing pharmaceutical companies, from patent expirations to new Medicare rules, has slammed into industry leader Pfizer Inc., which sharply scaled back earnings estimates and announced a sweeping restructuring.

Acknowledging that growth this year is sputtering to a halt, Pfizer said it would seek cost cuts of $4 billion, twice as deep as some analysts had expected. The company has seen sales decline sharply for Celebrex and Bextra arthritis pills because of safety worries, and for epilepsy and pain medicine Neurontin, which lost patent protection.

Yesterday, New York-based Pfizer said net income this year will be about $8.6 billion, or $1.16 a share, compared with net income last year of $11.4 billion, or $1.49 a share. Pfizer also calculates its earnings before adjusting for merger-related charges and a charge for taxes on repatriated foreign earnings. On that basis, which analysts follow closely, Pfizer now says its net income this year will be $2 a share, compared with $2.12 a share last year.

The company said it's undertaking an ambitious program of cost-cutting and restructuring that stretches from the factories that produce pills to the armies of sales representatives who call on doctors. Pfizer said the changes would allow it to return to double-digit earnings growth in 2006. It estimated that the cost of the restructuring would be $5 billion to $6 billion through 2008.

WALL STREET JOURNAL VIDEO Pfizer CEO Hank McKinnell comments on Tuesday's analyst meeting, areas the company may be targeting for acquisitions and his current compensation in light of the planned $4 billion in cost-cuts.

Pfizer Chairman and Chief Executive Henry McKinnell spoke of "a serious paradox" confronting the drug industry. "While the potential for medical breakthroughs has never been greater, the operating environment has never been more difficult," he said. For Pfizer, the industrywide challenges are "intensified by the reality of patent expiration," he said, including the earlier-than-expected loss of protection for Neurontin last year.

Like the rest of the drug industry, Pfizer is facing intense pricing pressure amid a wave of patent expirations on blockbuster drugs, vigorous cost-containment by insurers and governments, and a dry spell in the invention of new drugs that command top dollar. On the horizon: further pressure from the new Medicare drug benefit, which will begin in earnest next year. The largest expansion of Medicare since its inception 40 years ago, the prescription-drug benefit will undoubtedly work to damp prices.

Pfizer's plans to revamp its 11,000-person sales force in the U.S. are part of its adjustments to the Medicare change. The company will reorganize sales territories along state lines to reflect new Medicare coverage areas. In addition, it will reduce the number of different representatives calling on doctors to about two or three per product from as many as five currently. The move acknowledges doctors' growing frustration with the parade of Pfizer salespeople, each pitching the same product in nearly identical ways. Cuts in the sales staff, other than through attrition, aren't expected.

Pfizer executives are showing "serious intent to start to address the ills of their company," said Larry Eakin, senior director of growth equities for the Armada Funds, which recently added to its position in Pfizer.

In announcing the restructuring plans, Pfizer executives made it clear that the company has a tough road to travel before it can be considered a growth stock again. Pfizer shares, which traded above $40 five years ago, have been down in the past year. Some investors were skeptical of Pfizer's ability to achieve its goals because its announcement was short on specifics. Still, the stock rose 97 cents, or 3.7%, to $26.90 in 4 p.m. composite trading on the New York Stock Exchange.

Pfizer said revenue this year would be "substantially unchanged" from the $52.5 billion of 2004. Margins would be worse, in large part because of lower factory utilization caused by sales slumps for Celebrex, Bextra and Neurontin.

The company's cost-cutting plan, part of a broad restructuring that aims to increase efficiency, will rely on tougher purchasing policies, streamlining of information systems, factory closings and elimination of redundant work.

Pfizer has plenty of room to cut fat before hitting muscle, much less bone. Last year, selling, general and administrative expenses totaled $16.9 billion. The company will continue to spend heavily on research and development, with $8 billion planned this year, up from $7.68 billion in 2004.

The company expects to gain some financial flexibility by repatriating $28 billion in overseas profits this year under the American Jobs Creation Act. The legislation offers companies a one-time tax break, slashing the corporate rate on repatriated earnings to 5.25% from around 35%. Pfizer said the repatriated profits could go toward research and new products.

Pfizer executives reiterated the company's interest in acquiring new products and technologies, especially in biotechnology. The company's sterling debt rating and cash pile mean "we can afford to buy things that we want for our portfolio that others may be cautious about," said David Shedlarz, a Pfizer vice chairman.

But the company's health requires more than financial engineering. While Pfizer had until recently sustained less damage from generic copies of its drugs than other drug giants, it is entering an extended period of patent expirations for some of its biggest sellers. Last year antifungal Diflucan and Neurontin lost patent protection. Antibiotic Zithromax, another blockbuster with particularly strong sales, loses patent protection late this year. All told, drugs with about $14 billion in revenue will face generic competition by 2006.

Moreover, safety concerns have sharply cut sales of its arthritis medicines Celebrex and Bextra. These are in the same drug class as Merck & Co.'s Vioxx, which was withdrawn from the market due to heart risk. Pfizer executives said sales of those two drugs appear to have stabilized, and they hope sales will rise again.

Richard Evans, a drug-industry analyst with Sanford Bernstein, said, "the two things that concern me are the notion that Pfizer returns to growth in 2006 and 2007, and the extent to which that's predicated on Cox-2s growing." Cox-2s are a category of painkillers that include Celebrex, Bextra and Vioxx.

Consumers associate Celebrex with substantial heart-attack risk, despite the company's argument that Celebrex doesn't deserve to be lumped with Vioxx. Mr. Evans doesn't believe the Food and Drug Administration will permit Pfizer to resume advertising the drug to consumers again, which would hinder efforts to resurrect it. He expects sales of Celebrex to decline to $505 million during the first quarter compared with $769 million in the period a year earlier.

Not everyone was persuaded by the company's plans to scale back. "Pfizer needs to prove that it can do more than grow [earnings per share] through cost cutting," says Wendell L. Perkins, chief investment officer for Johnson Asset Management, adding that blockbuster drugs must emerge for the company to be able to deliver on expectations laid out in yesterday's meeting. "The risks of disappointment remain high," Mr. Perkins added. The JohnsonFamily Large Cap Value Fund holds positions in several major drug companies but has steered clear of Pfizer due to uncertainties about the future of the Cox-2 drugs and patent expirations.

Some investors were upbeat despite the challenges. The Jensen Portfolio, which has approximately $2.9 billion in assets, has been purchasing Pfizer shares all year, bringing its position in the drug company to four percent of assets. With a strong pipeline and larger-than-expected cost cuts, Jensen is bullish on Pfizer. "We believe they're a pretty good buy," says Robert Millen, Jensen's co-portfolio manager, "if you're patient and can wait."

Write to Scott Hensley at scott.hensley@wsj.com and Heather Won Tesoriero at heather.tesoriero@wsj.com

Corrections & Amplifications:

Pfizer Inc.'s net income this year will be about $8.6 billion, or $1.16 a share, compared with $11.4 billion, or $1.49 a share, for 2004, according to generally accepted accounting principles. This article incorrectly applied the term "net income" to Pfizer's adjusted income, a profit measure that Pfizer uses when discussing earnings with Wall Street. Those adjusted-income numbers are expected to be $14.9 billion, or $2 a share, for 2005, compared with $16.1 billion, or $2.12 a share, last year.

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