Following its restructuring, Pfizer's in-house manufacturing capacity will support approximately $48 billion in sales.

During an analyst meeting Jan. 22 in New York City, Pfizer announced widespread restructuring and cost saving initiatives designed to generate revenue growth and improve the company's performance.

Under one program, Pfizer is streamlining its manufacturing processes and will close manufacturing sites in Brooklyn, N.Y., and Omaha, Neb., and seek to sell a third site in Feucht, Germany.

"We are conducting additional site rationalization analyses and we will work to continue to look for ways to improve the efficiency of our production work," Pfizer Vice Chairman David Shedlarz said.

Pfizer estimates it will be able to support $1 billion in sales at each of its remaining 48 manufacturing sites.

The combined $48 billion in annual capacity would leave Pfizer little room to grow via in-house manufacturing; the company generated slightly over $45 billion in revenues in 2006, up two percent from the prior year.

Pfizer could gain additional capacity through external sourcing. The firm currently exports 15% of its production and plans to "at least" double that amount by 2010.

Despite announcing plans to limit its in-house manufacturing capacity, Pfizer highlighted its robust Phase II pipeline during the meeting. "It's the largest Phase II pipeline that we've ever had, and that will translate into the largest Phase III pipeline we've ever had, which is, again, the driver for a lot of changes that we announced today," Pfizer Global R&D President John LaMattina said.

During an analyst meeting in November, Pfizer said it expects its in-house and external-sourcing R&D programs to yield six new products per year beginning in 2010 (¹ Also see "Pfizer R&D Emphasizes M&A; Deal Structure, Integration To Be More Flexible" - Pink Sheet, 4 December, 2006., p. 5).

Another component of the cost-cutting initiative is the closure of five research sites, including three Michigan operations. The firm also plans to close international sites in Nagoya, Japan and Amboise, France.

Pfizer also plans to slash 10,000 jobs, or 10 percent of its total worldwide workforce, including over 20 percent of its European sales force. The firm said it has completed a 20 percent reduction of its U.S. sales force, which was announced in November (² Also see "Quality Not Quantity: Pfizer Cuts Sales Team To Increase Meaningful Contacts" - Pink Sheet, 4 December, 2006., p. 3).

"Fundamental change is imperative, and it must start happening now," CEO Jeffrey Kindler said. "Is that an overstatement, just some overheated corporate rhetoric? I don't think so. It reflects the reality that we face as a company and as an industry."

In total, the restructuring is expected to result in a net reduction in pre-tax expenses of between $1.5 billion and $2 billion by the end of 2008, after certain savings are reallocated to R&D.

This is "largely from site rationalization and research and manufacturing, streamlining organizational structures, staff function reductions, increased outsourcing and procurement savings," Shedlarz explained.

Pfizer's strategy is reminiscent of the cost-cutting program implemented by Merck CEO Richard Clark in 2005, which sought to reduce fixed costs for marketing and manufacturing while holding research and development expenditures flat (³ Also see "Merck Takes Cost-Cutting Therapy, But What Will The Side Effects Be?" - Pink Sheet, 5 December, 2005., p. 3).

Similar to Pfizer, Merck's initiatives initially fueled speculation from the investment community over how much cost-cutting the drug maker would need - and could sustain - to return to earnings growth. However, Merck's strategy appears to have paid off, with the firm's stock seeing strong gains in 2006 (⁴ [A#00690040009] p. 24).

The similarities between Pfizer's and Merck's cost-cutting programs could stem from both companies' adoption of Six Sigma efficiency programs. "Every day, at least one Six Sigma project is completed somewhere within Pfizer," Shedlarz noted.

Shedlarz reported that Pfizer currently has approximately 300 certified black belt employees, more than 500 certified green belt employees and has trained an additional 14,000 employees in the skills needed to become a Six Sigma certified yellow belt.

"Over the last year, our Six Sigma program has evolved into 'lean' Sigma in manufacturing, which will deliver the additional benefits to reduce cycle times, and reductions in the process inventory levels," Shedlarz said.

During an analyst meeting in December, Merck Research Labs President Peter Kim discussed the company's efforts to apply "lean" Six Sigma concepts to its manufacturing strategy, with a focus on reducing cycle times (⁵ Also see "Merck To Improve R&D Output By Having More Clues At The Start" - Pink Sheet, 1 January, 2007., p. 9).

Pfizer said it will introduce a new incentive program for employees as a part of the Six Sigma initiative. "We will be rolling out later this year a comprehensive training program that changes our compensation practices, which will reward behaviors and results consistent with the continuous improvement culture," Shedlarz said.

"We will attract and retain a diverse talent base that aligns our reward and recognition program to recognize individual leaders, and shareholder return contribution. This will help build a culture of accountability and responsibility," Shedlarz added.

In order to promote a culture of accountability and efficiency, Pfizer Worldwide Pharmaceutical Operations President Ian Read said the company's U.S. commercial organization will be realigned into five smaller business units, from one large organization, to enhance accountability among leaders.

"The U.S. pharmaceutical operation at $24.5 billion and 54 percent of pharma worldwide revenue is simply too big and too complex," Read said.

The separate units will include four separately managed commercial units in cardiovascular/ metabolic, urology/respiratory, central nervous system/pain and specialty that will each be responsible for their own profit and loss, as well as a fifth unit responsible for customer support to specifically address patient access and managed care.

"These units will be nimble, operate as separate performance units with dedicated sales, marketing and medical teams and they have focused goals and very clear accountabilities," the exec said. "This is what we need to drive results."

Pfizer said the commercial unit leaders, who will report directly to Read, will be announced at the appropriate time. Read was asked whether the leaders were being set up to fail under the restructuring, particularly given the sales force cuts.

"In modern democracy people don't take jobs they don't want," Read replied. "I have absolutely no concerns about them feeling that they are being set up to fail because I don't think I'm set up to fail and I don't think the organization is set up to fail."

In addition to the site closures, Pfizer is also reorganizing its R&D operations.

Research projects will be redeployed to centers that will now focus on key therapeutic areas. The major research centers will include Groton, Conn. (antibacterials, cardiovascular/metabolic and neuroscience); La Jolla, Calif., (oncology and ophthalmology research); St. Louis (inflammation and biotherapeutics); and Sandwich, U.K. (allergy/respiratory, antivirals, genitourinary/sexual health and pain).

Pfizer also intends to exit two research areas, gastroenterology and dermatology.

"We are convinced this structure will enhance our capabilities in speed, flexibility and optimal utilization of resources," LaMattina said. "Each will be characterized by a single leader with more responsibility, authority and accountability and more control over resource allocation."

Shedlarz said that Pfizer expects the firm's spending on R&D "to remain largely unchanged, but the mix and efficiency will change markedly, enabling us to self-fund significant growth in the product portfolio."

"With the changes we are making and the efficiencies we are gaining, we will be able to fund a large pipeline with a budget that is, in fact, about three percent smaller than it was in 2003," he added.

LaMattina said the company will seek to reinvest savings in their late stage pipeline, third party collaborations and new areas of focus, particularly biotherapeutics.

- Kathryn Phelps

Pfizer’s Manufacturing Cost-Cutting May Leave Little Capacity For Growth

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