The Pfizer Bust and Diversification

As John Simons reports on the bad news for Pfizer, he proves he knows little about financial economics:

When Big Pharma gets too big: The meltdown at Pfizer demonstrates that too many pharmaceutical giants have too much riding on a handful of potential drugs, argues Fortune’s John Simons.

For as long as anyone on Wall Street can remember, Pfizer executives have promised to follow up Lipitor, the company’s blockbuster cholesterol pill, with something even bigger and better. It’s not an assurance that’s easily kept. Lipitor, after all, generates $12 billion in annual revenue and is the biggest-selling medicine produced by any Big Pharma – ever … In spite of ever-expanding research budgets – since 1995, annual industry spending on R&D has more than doubled, to $31 billion – scientists are enjoying fewer eureka moments. Major drugmakers are struggling to come up with enough mass-market blockbuster drugs to maintain the industry’s fading aura of growth. That’s fine if the system to produce blockbusters keeps delivering. But when it fails, it fails big, as Pfizer has shown. As the world’s largest medicine maker and industry bellwether, the New York-based Pfizer’s setbacks always occur on a grand scale. As everyone knows by now, Pfizer executives wrung their hands all day Saturday, eventually deciding to terminate research on torcetripib, a once-promising experimental medicine designed to boost “good” cholesterol. According to an independent body of scientists reviewing data from a 15,000-patient study, torcetripib appeared to cause nearly twice as many deaths as similar drugs. It was an unfortunate discovery for a drug that Pfizer hoped to combine in a single pill with Lipitor. The combined juggernaut would have garnered peak sales of $8 to 10 billion a year, according to analysts. Lipitor could face generic competition as soon as 2010. torcetripib was considered key to bolstering Lipitor’s sales, once cheaper generic knockoffs enter the market.

Patent lives ending and promising drugs not passing phase III clinical trials are a fact of life. The failure of torcetripib wiped out about 15% of Pfizer’s equity. But the shareholders retain the other 85%. Simons is arguing that drug companies should neither merge nor be big. But let’s consider the implications of having each drug be developed by a separate corporation. When the promising in-process R&D turns out to be a bust – the entire equity of that corporation disappears. So one of the alleged reasons for bigness is portfolio diversification. Then again – I guess one could form a portfolio of single drug companies.