Pfizer takes its medicine after cholesterol disaster

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The Independent Online

On Thursday, it was "The Most Important New Development in Years". Two days later, it was history.

Investors had been just starting to get their tongues around the name of Pfizer's promising new heart disease medicine, Torcetrapib, which formed the centrepiece of the drug maker's presentations at a research and development conference at its giant lab complex in Connecticut last week.

Pfizer grew to become the biggest pharmaceuticals company in the world on the back of its blockbuster cholesterol medicine Lipitor, the first to lower LDL, so-called "bad cholesterol", whose build-up increases the risk of heart disease. Torcetrapib was to be its next trick, a drug designed to raise HDL, "good cholesterol", which improves people's cardiovascular health.

But data that was revealed to Pfizer on Saturday morning, by the independent monitors keeping an eye on the trial, changed everything. Far from reducing patients' risk of heart problems, the drug appeared to be causing more of them to die of heart attacks and other complications of high blood pressure. The monitors told Pfizer to halt the trial.

Executives abandoned their weekend plans - Pfizer's chief executive, Jeffrey Kindler, had to skip out on celebrations for his daughter's 18th birthday - and met to discuss the future for Torcetrapib. The inescap-able conclusion: no future.

After $800m (£404m) spent on the drug, and 15,000 patients enrolled in trials, the project has been scrapped. And with it goes the main plank of Pfizer's strategy for replacing annual revenues of $13bn from Lipitor, which loses patent protection in the US in 2010.

The share price reaction yesterday was unsurprisingly savage, down 15 per cent at the opening of trading. By the close, the shares had recovered slightly but were still down $2.96 (11 per cent) at $24.90, wiping $21.3bn off the company's value.

So far, so predictable. What happens next, though, will have consequences not just for Pfizer and its chances of hanging on to the top spot in the pharmaceuticals food chain. The company now looks set to embark on a more dramatic cost-cutting drive, and perhaps also an acquisition spree, that could reshape the entire drug industry. The shock of losing Torcetrapib strengthens the hand of Mr Kindler, just four months into the job and determined to push through "transformational change" at the company. His predecessor, Hank McKinnell, was unceremoniously dumped after failing to find a cure for Pfizer's decline in sales, which has accelerated since 2004 as a string of blockbuster drugs have lost patent protection and begun to face competition from cheap copycats.

Although Pfizer was able to boast on Thursday of having the most new drugs under development in its history, the number in the crucial final stage of human trials - drugs three years or less away from launch (Phase 3) - has declined significantly since the start of the decade. It is this dip in new product launches that has been concerning Wall Street, and the reason the $15bn of annual sales from Torcetrapib was so important.

Earlier cost-cutting efforts, despite an apparently large headline total of $8bn a year, have been received with a shrug on Wall Street. Investors worry these will barely be enough to mitigate the relentless downward pressure on drug prices being orchestrated by the giant health insurers. Matters could become even more desperate if the Democrats who now control Congress succeed in their aim of centralising the purchasing of drugs paid for by the federal government.

Mr Kindler is a lawyer rather than someone aligned with either the research or the sales side of the drug industry. Indeed, until five years ago he was running a subsidiary of McDonald's. He talks refreshingly tough. "We understand our challenges, and I expect to be held to account for facing them," he said yesterday. "It is important to remember that we are a financially strong and profitable company and that gives us the opportunity and the time to address these issues."

What might fundamentally change is the allocation of resources. Drug companies have traditionally spent twice as much money on marketing as they do on research and development, but cuts are likely to fall disproportionately on the former. Pfizer is promising to sketch a more detailed plan of cost cutting next month, but Mr Kindler has already made one significant show of force. Last week, he announced a 20 per cent cut in the sales force, some 2,200 redundancy cheques. The efficiency of the pharmaceuticals industry's sales reps has collapsed as they have grown in number, and they are now able to snatch only a moment or two per visit with harassed doctors.

Yet drug industry bosses have resisted significant cuts, warning there is no advantage from cutting back the promotion of your products if rivals are still promoting theirs. Pfizer's first step last week, plus any further reductions planned now that Torcetrapib no longer needs any sales reps, could trigger wider cuts in the industry's 100,000 sales force.

"I don't think that rivals will say it out loud or in public," says Mike Ward, drug industry analyst at Nomura Code, "but I think you will see companies working with smaller numbers of sales reps, and using them more efficiently. When the guys who account for 10 per cent of the market say they are cutting, then everyone else will sit back and think."

Analysts are also predicting that the budget for direct-to-consumer advertising in the US could be slashed. Television commercials and magazine ads require so many warnings on the side effects that they have gone up in cost and down in effectiveness. Jean-Pierre Garnier, chief executive of GlaxoSmithKline, is among the industry bosses to have questioned the value of such advertising, and increased use of targeted web advertising could offer a way out for everyone, if a major company such as Pfizer were to make the first move.

Meanwhile, the focus yesterday was on the short- and medium-term winners from Pfizer's agony. Investors will have to wait for more data before it becomes clear if the blood pressure problems were specific to Torcetrapib - in which case Merck and Roche, who are developing similar products, will gain from the disappearance of a rival - or are linked to raising HDL - in which case they will be losers.

Certainly AstraZeneca's Crestor, the most powerful cholesterol-lowering pill on the market, no longer faces a new rival for doctor's prescriptions in 2009. The UK company's shares rose 15p to 2,905p.

Analysts and investors were also swinging around in search of potential acquisition targets, now that Mr Kindler has pushed in-licensing and mergers and acquisitions up the agenda inside the company.

Barbara Ryan, analyst at Deutsche Bank, told clients: "Even before this news, we advocated that Pfizer should acquire a portfolio of marketed products with solid growth potential in the near to intermediate term that could fortify the revenue base and dilute the company's dependence on Lipitor. Now it becomes a necessity and in order to have that impact, needs to be on a substantial scale."

Shares soared in several mid-sized US pharmaceuticals companies, notably Celgene, which won approval to sell thalidomide as a cancer treatment, and Isis Pharmaceuticals, which has an experimental drug that boosts Lipitor's ability to lower bad cholesterol.

Pfizer has not shied away from big company acquisitions in the past. Having made some early purchases of vaccines technology, it may now be eyeing Wyeth, a $66bn vaccines giant.

Torcetrapib's demise has changed everything for Pfizer, and all Mr Kindler's talk yesterday of transformation. That may well mean a transformative acquisition in due course; it certainly means a transformation of the cost structure of the company - and the industry.