Wednesday, November 29, 2006

Color on news: Pfizer (NYSE:PFE)

Analysts are somewhat devided on what to think about Pfizer's (NYSE:PFE) U.S. sales force cut announced yesterday:

- Prudential notes that over the last few weeks it has been postulated that a sizeable sales force
reduction was in the works at PFE. Firm's understanding is that PFE has about 9,000 reps in the U.S. - a 20% reduction equates to 1,800 reps. Assuming $200K/rep in annual compensation and benefits, PFE stands to save about $360M in SG&A expenses annually.

As a highly profitable industry, the firm has generally felt that drug companies' organizational structures have ballooned over the past several decades, and only in rare circumstances have they had to push through heavy cost reductions. This suggests that PFE - and most of its peers - probably have additional room to cut, but this is likely to be a gradual process of trial and error.

Cost cutting is good, but to the firm the better way to "win" as a drug company is to have a solid pipeline of new drugs in development. PFE spends over $7B a year on R&D which suggests that, at some point, the company will likely have more to brag about. Whether this Thursday's analyst meeting will provide that opportunity is unclear. Maintains Overweight and $30 tgt.

- Morgan Stanley notes PFE announced plans to eliminate 20% of its U.S. sales force, or approximately 2,200 positions as part of its overall goal to achieve a more agile and slimmed down cost structure. The plan does not affect the approximate 20,000 reps outside the U.S. but the firm would expect management to look for opportunities to pare down in the international territories as well.

While great news, the level of savings from this plan of approximately $330 million (or EPS of $0.03) is likely just one step in a series of cost reduction programs that will enable the company to lower its cost base in 2007 and 2008 and hit its high single digit EPS targets.

They applaud management for taking this first really significant step towards reversing the "arms race" and hope that PFE's announcement gives other global pharma companies "cover" to do the same thing. The firm remains Overweight PFE shares and expects the stock to react favorably to the announcement. They also anticipate a relatively upbeat R&D presentation on Thursday for which expectations are relatively low.

- UBS views this as a bold move (and a right one for the industry in general) but they are unsure of how and when the rest of its peer group (especially those with promotion sensitive products and the means to maximize this opportunity) will react.

Firm notes that in comparison to its peer group, a large part of PFE's product portfolio comprises of products that are in the primary care physician domain and many of its key products compete in categories with multiple therapeutic options and likely need continued detailing support. Furthermore promotional support will also be important for growth of new products such as Lyrica, Chantix and Exubera (where PFE is yet to meaningfully channel selling resources).

While PFE believes that this change is to address field force saturation with little impact expected on the sales performance, the firm remains slightly skeptical and believes that in the short term PFE could suffer from being the 1st mover until the playing field levels (with similar cuts from its peer group). UBS notes that when PFE had a modest reduction in its sales force ahead of its restructuring activity (late 2005), there was a significant impact on the number of audited details (as recorded by IMS) with 2005 Y/Y details down 28% and 2006 YTD details down ~20%. Maintains Neutral and $30 tgt.

Notablecalls: Looks like a case of some s-t pain vs. l-t gain. Considering there were rumors regarding a possible sales force reduction ahead of the announcement (I've actually been hearing these for the past 3-4 yrs) I think the upside may be somewhat limited. Not calling this a fading oppy as the R&D meeting scheduled for tomorrow may prolong the optimism.

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