Preview File Edit View Go Tools Window 76% Sun 10:40 AM E Help Strategic Management Concepts and Cases Competitiveness and Globalization 13th Edition By Michael A. Hitt (page 631 of 764) Q Search STRATEGIC MANA Sort by: Search Rank Page Order < > Done Strategic Manage...el A. Hitt Case 12: Pfizer C-163 CASE 12 ROBINS School Business PDF Pfizer Vince 2020 January 2017 reforms was significant increases in the time and cost for drug manufacturers to bring new drugs to market. “When Ian Read, an accountant and company lifer, took In 2006, a study estimated the cost of bringing a new over as Pfizer's chief executive in December 2010, the drug drug to market was between $802 million and $2 billion, firm was facing the impending patent expiration of Lipitor, depending on the type of drug being developed and the the best-selling drug ever made, and the utter failure of one number of drugs being developed simultaneously. The of the most lavishly funded research laboratories on the study found that approximately 60% of the total cost of planet to develop much of anything. The stock was suffering, drugs was related to pre-market clinical trials required and Read's predecessor-Jeffrey Kindler, a bearlike lawyer by the FDA. As inflation, increased regulation, and other hired from McDonald's-had just spent $68 billion to buy factors have affected the pharmaceutical industry, a 2012 rival drug maker Wyeth in a Hail Mary strategy shift. Now study indicated that the cost per drug for the largest Read had to make it work." manufacturers has increased to over $5.5 billion. For Pfizer, the total Research & Development (R&D) cost Company and Industry for each drug that received FDA approval was $7.7 billion Background between 1997 and 2011. The steep rise in development costs has forced many large drug manufacturers- Pfizer was established in 1849 in Brooklyn, New York, by including Pfizer—to cut R&D budgets in an attempt to cousins Charles Pfizer and Charles Erhart with a loan of control rising costs. $2,500 from Pfizer's father.? Today, 167 years later, Pfizer The reduction in R&D funding in reaction to expand- Inc. has international revenues of $49 billion, which ing costs has led to stifled innovation and revealed a cri- makes it the second-largest pharmaceutical manufac- sis looming ahead for many large drug manufacturers turer in the world. Despite Pfizer's success, the company in the industry. Not only have many drug companies' has faced many challenges over the last few decades. The blockbuster drugs gone off patent in recent years, but the pharmaceutical industry is heavily influenced by legal, reductions in R&D spending have resulted in drug pipe- political and technological forces, and all indications are lines that have failed to produce anything of significant that the industry will continue to experience dramatic value. The number of new drugs approved by the FDA changes. per billion dollars of R&D expenditures has halved every Since the passing of the Food and Drug Act in 1906, nine years since 1950." The rapid increase in the cost of the Food and Drug Administration (FDA) has had reg- drug development and the reduction in the approval fre- ulatory authority over drugs in the United States. The quency of blockbuster-level drugs has led many industry scope of its initial authority was limited and in 1938 experts to largely consider the current, fully integrated President Roosevelt signed the Food, Drug and Cosmetic business model of large pharmaceutical companies to be Act (FD&C) into law, which significantly expanded fed- unsustainable. eral oversight of drug manufacturing and marketing.* In addition to granting the FDA authority to mandate Business and Strategies pre-market review of drugs, the FD&C also allowed the FDA to regulate drug labeling and advertising. Then, in Like most large pharmaceutical manufacturers, Pfizer 1992, Congress passed the Prescription Drug User Fee pursues a “blockbuster” business model that is heavily Act, which enables the FDA to collect fees from drug reliant on its R&D pipeline to consistently develop and manufacturers to aid in funding the pre-market review launch high volume drugs—drugs with expected annual process for new drug approvals. The effect of these revenues of $1 billion or greater. In 2012, Pfizer began Written by Jeffrey S. Harrison, Ryan McGowan, Kevin O'Neill, Lauren Shotwell, and Joshua Torres at the Robins School of Business, University of Richmond. Copyright © Jeffrey S. Harrison. This case was written for the purpose of classroom discussion. It is not to be duplicated or cited in any form without the copyright holder's express permission. For permission to reproduce or cite this case, contact Jeff Harrison at RCNcases@richmond.edu. In your message, state your name, affiliation and the intended use of the case. Permission for classroom use will be granted free of charge. Other cases are available at: http://robins.richmond.edu/centers/case-network.html Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 26 A P О w W W Preview File Edit View Go Tools Window 76% Sun 10:40 AM E Help Strategic Management Concepts and Cases Competitiveness and Globalization 13th Edition By Michael A. Hitt (page 632 of 764) Q Search STRATEGIC MANA Sort by: Search Rank Page Order < > Done Strategic Manage...el A. Hitt C-164 Part 4: Case Studies Exhibit 1 Pfizer Business Segment Comparisons PDF Business Segment Financials Innovative vs Established Segments Vince 2020 2015 2014 2013 Innovative Established Innovative Established Innovative Established Revenues $26,758 $21,587 $24,005 $25,149 $23,602 $27,619 4,732 3,650 4,486 3,848 4,570 3,675 13.60% 20.80% 16.00% 18.20% 15.60% 17.10% 6,807 3,572 6,162 3,903 5,520 4,714 3,030 758 2,549 657 2,154 737 Cost of Sales % of revenue Selling, informational, and administrative expenses R&D Expenses Amortization of intangible assets Restructuring charges and certain acquisition-related costs Other (income)/deductions-net Income from continuing operations before provision for taxes on income 94 36 69 85 58 100 6 (1.087) (150) (576) (1.096) $12,472 (265) $16,199 (216) $17,552 $14,264 $12,885 $12,765 Screen Shot 2020-0...40.14 AM Source: 2015 Pfizer Annual Report. Global Vaccines, Oncology, and Consumer Healthcare Business. This segment consists of three businesses with the following key elements: (1) poised for high, organic growth; (2) distinct specialization and operating models in science, talent, and market approach; and (3) struc- tured to ideally position Pfizer to be a market leader on a global basis." Consumer products include Advil", Centrum®, Robitussin", Nexium®, and ChapStick®. restructuring its operations into a new commercial oper- ating model. Pfizer divested its infant nutrition business for $11.9 billion and spun-off its animal health unit, Zoetis. Additionally, Pfizer restructured its operations into two primary business segments: Innovative Products and Established Products. Pfizer's Innovative Products busi- ness is further divided into the Global Innovative Pharma (GIP) and Global Vaccines, Oncology, and Consumer Healthcare (VOC) businesses. '4 Ian Read commented regarding the restructuring: "This represents the next steps in Pfizer's journey to further revitalize our innova- tive core. Our new commercial model will provide each business with an enhanced ability to respond to market dynamics, greater visibility and focus, and distinctive capabilities." Exhibit 1 contains some useful financial comparisons between Pfizer's Innovative Products and its Established Products. Established Products Business Global Established Pharma (GEP) Business. This area con- sists of three primary product segments: (1) Peri-LOE products which are losing or approaching a losing position in market exclusivity; (2) legacy established products in developed markets that have lost market exclusivity and those with growth opportunities; and (3) emerging market products with growth opportunities such as organic initiatives, partnerships, product enhance- ments, sterile injectables, and biosimilars. Examples of established products include Celebrex®, EpiPenº, Zoloft", and Lypitor®. Innovative Products Business Global Innovative Pharma (GIP) Business. This busi- ness focuses on developing, registering and commer- cializing novel, value-creating medicines that improve patients' lives. Therapeutic areas include inflamma- tion, cardiovascular/metabolic, neuroscience and pain, rare diseases and women's/men's health, and include leading brands, such as Xeljanzº, Eliquisº, and Lyrica”. GIP has a robust pipeline of medicines in inflammation, cardiovascular/metabolic disease, pain, and rare diseases. 16 Pricing Strategy Pfizer's and other large drug companies' revenue growth has been largely dependent on raising the price of older drugs, particularly those nearing patent expirations. Approximately 34% of Pfizer's revenue growth over the past three years has come from increasing prices on existing drugs. Over this period, Pfizer has increased Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 26 A o- P О w W W Preview File Edit View Go Tools 76% Sun 10:40 AM E Window Help Strategic Management Concepts and Cases Competitiveness and Globalization 13th Edition By Michael A. Hitt (page 633 of 764) Q Search STRATEGIC MANA Sort by: Search Rank Page Order < > Done Strategic Manage...el A. Hitt Case 12: Pfizer (-165 PDF Vince 2020 Screen Shot 2020-0...40.14 AM the price of Viagra by 57%, of Lyrica by 51%, and of Premarin by 41%. A 2013 study by the AARP found that the price of Lipitor rose by 9.3% in the year preceding patent expiration, and by 17.5% in 2011, the year of expi- ration.20 Pfizer is not alone in these practices. AbbVie and Bristol-Myers Squibb have both been reported as generating a very significant amount of their revenue growth from price increases. Drug pricing scandals and increased media and societal attention on drug pricing in general makes Pfizer's reliance on pricing strategy to drive top-line revenue growth unsustainable. This is evident in the drug industry's flat net pricing in 2015.21 Growth Strategy Pfizer has become one of the largest pharmaceutical com- panies in the world primarily as a result of aggressive mergers and acquisitions (M&A). Pfizer's acquisitions have been focused on two main strategies: expanding its capabilities and acquiring brands with strong rev- enues. Many of Pfizer's acquisitions have provided new capabilities for the organization, such as biolog- ics with the acquisition of Warner-Lambert in 2000 and biosimilar drugs with the acquisition of Hospira in 2015. Additionally, Pfizer acquired the rights to the best-selling drug Lipitor in its 2000 acquisition of Warner-Lambert and the rights to Celebrex and Bextra in its 2003 acquisition of Pharmacia Corporation. From Pfizer's press releases and company history, a brief time- line of Pfizer's major acquisitions (and divestitures) is outlined below22: 2000: Pfizer acquires Warner-Lambert for $90 bil- lion for their biologics and consumer prod- ucts portfolio, along with the rights to Lipitor. 2003: Pfizer acquires Pharmacia Corporation for $60 billion and acquires the rights to Celebrex, Bextra, Detrol, and Xalatan. 2005: Pfizer acquires Vicuron Pharmaceuticals for $1.9 billion for their antibiotic research and development 2006: Pfizer sells its consumer products division to Johnson & Johnson for $16.6 billion. 2007: Pfizer acquires Coley Pharmaceutical for $164 million for their portfolio of biotechnology, cancer, and vaccine drugs. 2009: Pfizer acquires Wyeth for $68 billion for their portfolio of biotech drugs. 2010: Pfizer acquires King Pharmaceuticals for $3.6 billion and acquires the rights to EpiPen. 2015: Pfizer Acquires Hospira for $16 billion for their biosimilar and injectable drugs portfolio, as well as infusion technologies.23 2016: Pfizer acquires Anacor Pharmaceuticals for $5.1 billion for their topical anti-inflammatory drugs and acquires the rights to Crisaborole.24 2016: Pfizer acquires Medivation for $14 billion for its prostate cancer drug Xtandi.25 Pfizer has attempted unsuccessfully to acquire a foreign drug company and relocate its headquarters overseas. CEO Ian Read has said numerous times that the company faces a competitive disadvantage with foreign rivals that have significantly lower tax bills.26 These sorts of deals are called corporate inversions, transactions undergone by a U.S. company that moves its tax residence to a foreign country in order to reduce U.S. taxes. 27 In 2014, Pfizer attempted a merger with rival AstraZeneca, which faced fierce opposition from lawmakers on either side. In the end, Pfizer walked away from the $118 billion deal after rejection by AstraZeneca's board.28 In 2016 Pfizer entered into an agreement to merge with Allergan. The $160 billion deal would have created the largest pharmaceutical company in the world and would have allowed Pfizer to relocate its headquarters to Allergan's home country of Ireland in order to take advantage of their lower corporate tax rate.” However, on April 4, 2016, the U.S. Department of Treasury took measures to limit corporate inversions.30 Previously, a company realized tax benefits for inversions only when the foreign company would contribute 20% or greater of the combined company's assets. The new ruling dis- regards the last three years of U.S. acquisitions by the foreign entity when determining the foreign company's relative size under the combined entity. The new rule was the predominant factor that caused Pfizer to pay $150 million to walk away the Allergan deal.3Pfizer would not have realized the full tax benefit of the inver- sion because Allergan's relative size would have fallen below the 20% threshold under the new tax rules. Innovation Strategy Pfizer has a long history of investing in R&D for the development of blockbuster drugs. However, many industry experts believe the age of blockbuster drugs has come to an end and that new blockbusters will be rare. 32 They argue that the opportunities for revolution- ary drugs have been mostly exploited, with very few areas of medicine in which breakthrough drugs can have a huge impact. In light of industry trends, Pfizer has shifted its strategy of maintaining an industry- leading drug pipeline from in-house development to being more reliant on strategic partnerships and mergers and acquisitions. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 26 A P О w W W Preview File Edit View Go Tools 76% Sun 10:40 AM E Window Help Strategic Management Concepts and Cases Competitiveness and Globalization 13th Edition By Michael A. Hitt (page 634 of 764) Q Search STRATEGIC MANA Sort by: Search Rank Page Order < > Done Strategic Manage...el A. Hitt C-166 Part 4: Case Studies PDF Vince 2020 Screen Shot 2020-0...40.14 AM To support its interest in strategic partnerships, in and Analytics, and within that role she was part of the 2004 Pfizer founded Pfizer Venture Investments (PVI). task force that “redesigned Pfizer's R&D organization to Its goal is to identify and invest in strategic areas and strengthen its pipeline and improve efficiency?"36 businesses at the leading edge of healthcare science and technologies. PVI started with a $50 million annual Executive VP Chief Development Officer, Rod budget and was Pfizer's way of staying ahead of industry Mackenzie, PhD. Rod Mackenzie received his PhD trends and investing in companies which are developing from Imperial College, London, after getting his chem- compounds and technologies that will enhance Pfizer's istry degree from the University of Glasgow. As the co- drug pipeline and help drive the future of the pharma- inventor of Darifenacin, which was sold in 2003 due ceutical industry.33 In January 2016, Pfizer announced to regulatory issues, MacKenzie held various positions that it would be expanding its investment strategy to within Pfizer before assuming his current position.37 include investments in early-stage scientific innova- His role oversees “the development and advancement tions in immuno-oncology, gene therapy, and other of Pfizer's pipeline of medicines in several therapeutic cutting-edge fields. Pfizer invested nearly $46 million areas.” He serves on the Portfolio Strategy and Investment in four companies in these fields: BioAtla, NextCure Committee and sits on the Board of Directors for Viiv Inc., Cortexyme Inc., and 4D Molecular Therapists, Inc. Healthcare.38 Pfizer's strategic partnership with these and other firms provides a world-class resource in start-up organizations Executive VP Business Operations and CFO, to accelerate the pace of scientific innovation and to help Frank D'Amelio. Frank D'Amelio joined the company develop their pipeline of drugs. 34 in September 2007 and oversees finance, business devel- opment, and business operations. He has been ranked Inside Pfizer as a top CFO for various years by Institutional Investor magazine. He has led the organization in many mergers, Management Team spin-offs, and sales, such as: Pfizer and Wyeth merger, CEO, lan C. Read. Ian C. Read was elected CEO of sale of their nutrition business, and the spin-off of Zoetis. Pfizer in December of 2010 and Chairman of the Board His experience comes from his many leadership roles at in 2011, taking over from Jeffrey Kindler. Read has spent Alcatel-Lucent, including Senior Executive Vice President his entire career at Pfizer, starting as an operational audi- of Integration and Chief Administrative Officer, and his tor. Read's B.S. in chemical engineering and accounting experience as COO of Lucent Technologies. Frank earned experience set the groundwork for a successful career his MBA in Finance from St. John's University and his in pharmaceuticals. Some of his previous roles included bachelor's degree in Accounting from St. Peter's College. CFO of Pfizer Mexico, Country Manager of Pfizer Brazil, Representing Pfizer, he currently serves on the Board of President of Pfizer's International Pharmaceuticals Group, Directors for many organizations. They include, Humana, Executive Vice President of Europe, and Corporate Vice Inc., Zoetis, Inc., the Independent College Fund of New President. Read also serves on the boards of Pharmaceutical Jersey, and the Gillen-Brewer School. 39 Research Manufacturers of America (PhRMA), which represents the leading innovative biopharmaceutical Major Shareholders research companies. 35 Pfizer is a publicly traded company with approximately 6.2 billion shares outstanding at December 31, 2015.40 Executive VP Strategy Portfolio and Commercial According to Yahoo Finance, among Pfizer's primary Operations, Laurie J. Olso. Laurie Oslo oversees shareholders are institutional investment companies long-term strategy, execution of commercial objec- Vanguard Group, Inc., BlackRock Institutional Trust tives, and advises portfolio functions for R&D invest- Company, and JPMorgan Chase & Co., who own 6.32%, ment strategies. She started working for Pfizer in 1987 4.95%, and 1.89% of total outstanding shares, respec- in Marketing Research. As an economics graduate from tively. Additionally, Pfizer's only major non-institutional the State University of New York at Stony Brook and shareholders are all executive-level leadership within the with a MBA from Hofstra University, her experiences organization. span across domestic and global leadership positions in marketing, commercial development, strategy, analytics Human Resources corporate responsibility, and operations. Her most recent Human resource efforts are led by Charles H. Hill III, role was Senior Vice President of Portfolio Management who has been the Executive Vice President of Worldwide Screen Shot 2020-07...0.26 AM Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 26 A o P О w W W Preview File Edit View Go Tools 76% Sun 10:40 AM E Window Help Strategic Management Concepts and Cases Competitiveness and Globalization 13th Edition By Michael A. Hitt (page 635 of 764) Q Search STRATEGIC MANA Sort by: Search Rank Page Order < > Done Strategic Manage...el A. Hitt Case 12: Pfizer (-167 PDF Vince 2020 Human Resources since December 2010. Prior to that assignment, Hill was Senior Vice President of Human Resources for the Worldwide Biopharmaceuticals Businesses from 2008 through December 2010. On December 31, 2015, Pfizer employed approximately 97,900 employees across the globe. 41 In 2007, Pfizer Global Manufacturing, a global man- ufacturing site in the U.K., was recognized for their Explorer training program. The Explorer program was a year long and covered team dynamics that included pur- pose, leadership, motivation, meetings, and the environ- ment, among other topics. For each of the four training segments, there were pre-workshop activities, two-day workshops, post-workshop assignments, and a follow-up workshop. 42 Pfizer also uses traditional techniques to develop their personnel. Employees are expected to collaborate with their direct leaders to create individual develop- ment plans. They have also implemented a tool called Mentor Match. It is designed to allow employees to volunteer as a mentor or search for mentors with cer- tain characteristics. Managers are encouraged to give frequent and in-depth performance appraisals in lieu of the standard annual review process. Pfizer also uses short-and medium-term job rotations or projects to help further the development of their employees.33 Operations & Supply Chain Each of the Innovative Products and Established Products businesses is led by a single manager respon- sible for both commercial productivity and research and development activities that meet proof-of-concept requirements. The Innovative Products Business is tasked with development and commercialization of new medicines and vaccines. The Established Products Business focuses on branded generic medicines and leg- acy brands that have lost or will lose market exclusivity in the short term. Both businesses have geographic foot- prints that span developed and emerging markets. *7 Pfizer has a truly global supply chain network with 64 internal manufacturing facilities, over 200 supply chain partners, and 134 logistics centers in 2015. Pfizer claims to have over 850 major product groups. Due to the high demands for traceability, Pfizer employs a seri- alization program across its supply chain. Pfizer also uses their Highly Orchestrated Supply Network (HOSuN) to connect inventory, transportation, logistics and its asso- ciated security, compliance, environmental health and safety, and other functions into a truly integrated system. They also use HoSuN for business continuity risk assess- ment and resolution. 48 Manufacturing pharmaceuticals can be extremely complex. For example, the vaccine known as Prevenar 13 was produced for the one-billionth-time in 2015. According to Pfizer, manufacturing Prevenar 13 includes the participation of 1700 employees, 678 quality tests, 400 different raw materials, and 580 steps in manufac- turing, over 2 years.49 Pfizer earned 56% of its 2015 revenue from oper- ations outside the United States, which represented $27.1 billion. Japan is the second largest market, behind the United States. 50 Screen Shot 2020-0...40.14 AM Screen Shot 2020-07...0.26 AM Organizational Culture Upon taking charge of Pfizer in 2010, Read soon discov- ered that many of the processes in place at Pfizer were broken. The process for FDA drug applications was so bad that the FDA sometimes refused to even review submitted applications. Read demanded answers, and the only answer he received was that everyone knew the application didn't meet the required quality standards, but nobody was willing to speak out about it. Read's response was to hand every employee a gold coin with the words “Straight Talk” on one side and “OWNIT!” on the other side. It was Read's way of empowering his employees to speak up to their boss when they believe they are wrong, but above all, to create accountability.44 Since then, OWNIT! has become ingrained in Pfizer's culture.45 Screen Shot 2020-0...40.31 AM Mission, Purpose, and Values 46 Pfizer's mission is: “To be the premier, innovative bio- pharmaceutical company." Pfizer's purpose is: “Innovate to bring therapies to patients that significantly improve their lives.” Pfizer's core values are: “Customer focus; Community; Respect for people; Performance; Collaboration; Leadership; Integrity; Quality; Innovation." Marketing and Distribution Pfizer promotes its products within the global biophar- maceutical business to healthcare providers and patients. Pfizer's marketing organization is responsible for educating a wealth of stakeholders regarding product approved uses, benefits, and risks. Pfizer employs a direct-to-consumer advertising campaign in the U.S.; this provides similar information and suggests that interested customers have discussions with their doctor. Pfizer's "Global Consumer Healthcare business uses its own sales and marketing orga- nizations to promote its products and occasionally uses dis- tributors in smaller markets.” Television, digital, print, and in-store media are all used to advertise to consumers. In the U.S., all products must be approved by the FDA prior to any marketing campaigns. The FDA oversight 51 Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 26 A o- P О w W W
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