DJIA member, and industry leading pharmaceutical company Pfizer has had a rough go of it the last 4 years. While revenues are up from 2001, they were flat in 2005 signaling a growth stall. This had been predicted since 2001, as earnings have been highly erratic over these years. Company value peaked in the late 1990s, and since then investors have lost half their value.
The Challenge at Pfizer is the same malady affecting several other big pharma companies. Their strategy to rely on blockbuster drugs, those that address widespread human conditions (such as male impotence), has left them see-sawing between enormous investments and difficulties getting approvals for sale through the FDA – as well as losses from rushing drugs to market that have later been found not as safe as promised. While there are lots of other opportunities for these companies to grow, many of them keep trying to find the next "blockbuster" and their growth is erratic.
Pfizer’s latest reaction has been to sell their consumer goods business. Even though the business has been growing at a strong 10%/year, and has an 18% operating profit, management has said the business is "non core" and thus they want to sell it. Not many consumers who need Benadryl, Zantac, Rolaids, BenGay and Rogaine think of these products as "non core," but for some reason Pfizer now does.
Management’s real objective is to generate additional cash in an effort to Defend & Extend its poorly producing old Success Formula. Rather than Disrupting their old, and struggling, Success Formula, Pfizer would rather sell a great, growing, profitable business in an effort to make another stand for what the company has always done – even if there is no reason to believe it will be more successful in the future.
Pfizer has $52B in revenue. Their proceeds from the sale will be $14B. That’s before taxes – which could be half the proceeds. But rather than trying to grow this business even faster, they are ready to sell it to Glaxo SmithKline or Johnson & Johnson. Both of these companies are huge as well, but both of them know how to recognize a pearl in the oyster bed. They are ready to grow what Pfizer won’t.
Normally, the investors in selling businesses come out the winner. But in this case, the buyers are the winners. They are getting great brands in a great business with opportunities to increase their growth rates simply because the current owner is too Locked-in to its "blockbuster" addiction to unleash the value in its own assets.
This is too bad for Pfizer’s shareholders. They get a relatively small amount of cash and they give up a potentially high growth business. And all because leadership is focused on its short-term problems, rather than the long-term Challenges to its Success Formula. And thus Pfizer leadership is Defending & Extending a struggling model, hoping to regain past glory, instead of using Disruptions and White Space to create new value.
