Source: Wall Street Journal
By AVERY JOHNSON
Pfizer Inc. Chief Executive Jeffrey Kindler's decision to scrap an unpopular drug bucked an unspoken industry rule: Products can linger on life support as long as they pose no safety problems.
But the staggering cost of making and marketing Exubera, an inhaled insulin the company had pursued for more than a decade, helps explain Mr. Kindler's announcement Thursday that Pfizer would stop selling it. The move -- a sharp break with industry precedent that came with a $2.8 billion charge -- is one of the first that lives up to his pledge to transform the way the stumbling company does business.
The move also is in line with his goal of making Pfizer more responsive to the people who use its products. But while Exubera's demise solves a short-term problem for Pfizer, and won Mr. Kindler kudos on Wall Street for making a hard choice, the way Pfizer broke the news to its licensing partner could undermine a key part of its turnaround strategy.
"This is a guy who came in from the fast-food business selling chicken, where decisions are made in seconds, and now he's in the pharmaceutical industry with a complex diabetes product that affects patients over decades," says Andrew Forman, managing director of health care at investment firm W.R. Hambrecht, who has followed inhaled insulin since the 1990s.
Drug makers usually let underperforming products languish on the market, happy to squeeze out whatever sales they can. The drastic -- and costly -- step of pulling products usually is reserved for cases involving significant safety concerns, or in response to regulators' demands.
Yet Exubera cost Pfizer $775 million to manufacture and promote this year, according to an estimate by a drug-industry analyst at Credit Suisse Group. Insulin is much costlier to make than a traditional chemical pill; Pfizer's blockbuster cholesterol fighter Lipitor eats about eight cents of every dollar it generates, while Exubera cost Pfizer about 30 cents for every dollar earned, says Catherine Arnold at Credit Suisse.
Pfizer told investors on Thursday that Exubera brought in just $12 million in sales, nowhere close to breaking even with such costs.
Exubera's route from the lab to the market piles on expenses. The insulin is made in Germany, shipped to California to be sprayed and turned into a powder, packaged into foil wrappers in Indiana and then inserted into a device made in Arizona. Pfizer paid Nektar Therapeutics, from which it licensed the drug, about 15% of sales, and also paid Nektar to make the device and spray-dry the powder. In the first quarter of this year, Nektar received about $60 million from Pfizer.
Promoting the drug to primary-care doctors required big outlays. In recent years, drug companies have been entering markets for more-specialized medicines for diseases such as cancer, in part because smaller sales forces can reach the limited number of specialists. Pfizer spent about $370 million this year promoting Exubera, which required it to send special diabetes educators to doctors' offices to teach them how to use the new device, and to invest in direct-to-consumer advertising. Promoting a new cancer drug called Sutent, by contrast, cost Pfizer $200 million, Credit Suisse says.
Pfizer declined to make Mr. Kindler available for an interview Friday. But the CEO's public comments indicate Mr. Kindler aims to bring something new to the drug industry: A fast-food-like focus on what the market wants. At a meeting with investors in January, he pledged to create new commercial units to get closer to customers. And on Thursday, he explained his decision to pull Exubera as a sign of Pfizer's new commitment to "listen to our customers."
Pfizer also is aiming to become more nimble by forging more licensing agreements like the one with Nektar, but its handling of the Exubera situation could make that tougher to do. Pfizer didn't tell Nektar it would stop selling the product until after announcing the decision early Thursday morning. Pfizer says it didn't notify the small San Carlos, Calif., company because the news was material for both. Nektar, blindsided and angered, sharply criticized its longtime ally.
A Pfizer spokesman says the company has a strong record of partnerships and is committed to building more.
Nor does pulling Exubera solve Pfizer's fundamental problem, namely that $13-billion-a-year Lipitor loses its patent protection as early as 2010. Jami Rubin, a Morgan Stanley analyst, wrote in a research note that canceling Exubera was a smart move but that without anything to replace Lipitor, Pfizer is "coasting towards an abyss."