FT.com / Lex - Pfizer/Merck

It has been a tumultuous week for US big pharma. Just five days after Merck’s chief executive resigned unexpectedly, Pfizer CEO Jeffrey Kindler surprised shareholders by announcing his departure on Sunday. It is tempting to see a divergence in strategy behind the boardroom shuffles. Merck’s new chief is its general counsel who helped navigate the company through potentially ruinous Vioxx litigation while Mr Kindler, Pfizer’s former counsel, is being replaced by a life-long pharmaceuticals salesman.

Though his cautious four-and-a-half year tenure saw Pfizer underperform its peers, that is in part just bad luck. Very soon after taking over, a year was shaved off patent exclusivity for leading drug Lipitor while ostensible blockbuster torcetrapib, seen as its replacement in the anti-cholesterol field, failed in clinical trials. In recent months Pfizer has suffered other stinging clinical setbacks. Mr Kindler’s main achievements were returning wads of cash to shareholders – some $45bn through buy-backs and dividends – and slashing costs, a key motivation behind the $68bn acquisition of Wyeth last year.

But Merck’s strategy has been much the same, including its acquisition of Schering-Plough last year. Faced with daunting patent cliffs and poor returns on research and development spending, both have slashed costs while swallowing up smaller rivals. Shrinking valuations have outweighed cash returns though: since the beginning of 2000, Pfizer and Merck have negative shareholder returns of 27 per cent and 19 per cent respectively. Now stuck with utility-like dividend yields, the only currency left to pursue growth is shareholders’ cash.

Incoming chiefs should not be tempted by displeasure to change course now and risk destroying even more value. Multiple contraction has been painful but, in hindsight, firing people has been more profitable than chasing the next wonder molecule. It is easy to see why pharma bosses burn out so quickly.

via ft.com

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