Internet Mini Case 2
Pfizer, Inc.
Maryanne M. Rouse
A research-based, global pharmaceutical company, Pfizer, Inc. (PFE) was founded as a chemical
products firm in 1849 by Charles Pfizer and Charles Earhart. The company grew rapidly during
the Civil War, providing cream of tartar, tartaric acid, iodine, chloroform, and camphor to Union
forces. After perfecting the fermentation of citric acid from imported lemon and lime
concentrates in the early 1880s, Pfizer expanded to Chicago in 1882. During the 20th century,
the company grew both internally and via acquisition, consolidating its pharmaceutical base and
diversifying into consumer health care, animal health, confectionary products, shaving products,
and pond and aquarium supplies. For reporting purposes, Pfizer divided its operations into two
segments: pharmaceutical and consumer products. Fiscal year 2001 sales were $32.259 billion,
with 91% from human and animal health products and 9% from confectionary products, shaving
products, and pond and aquarium products:
Pharmaceuticals
Human pharmaceuticals
Animal health care
79.0%
4.5
Total pharmaceuticals
83.5%
______________________________________________________________________________
This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida. Copyright © 2005
by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without the written permission of the
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books, Strategic Management and Business Policy – 10th Edition (and the International version of this book) and Cases
in Strategic Management and Business Policy – 10th Edition by the copyright holder, Maryanne M. Rouse. This case
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Consumer Products
Consumer health care
7.5%
Confectionary
6.2
Shaving products
2.0
Tetra pond and aquarium
.8
Total Consumer Products
16.5
Total sales
100.0%
Quarterly results for the first three quarters of 2002 showed little change in composition of
revenue. Pfizer earned revenue in excess of $500 million in each of seven countries outside the
United States in 2001. Sales by geographic segment for the fiscal years 1999-2001 were:
United
All
States
Japan
Others
Total
2001
$19,932
$2,102
$10,225
$32,259
2000
17,753
2,062
9,540
29,355
1999
16,464
1,716
8,986
27,166
Human Pharmaceuticals
With the acquisition of rival pharmaceutical firm Warner-Lambert in June 2000, driven by
Pfizer’s desire to gain control of full profits from sales of Lipitor, Pfizer became the world’s
largest ethical pharmaceutical (prescription drug) company, as measured by sales. Pfizer’s
impressive product portfolio, which included 5 of the 10 most prescribed medicines in the United
States in 2001, was also fairly well protected from generic competition over the next five years.
The company had a presence in nine drug segments:
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
Cardiovascular: This segment included Lipitor, the world’s largest-selling cholesterollowering agent (sales of $6.4 billion in 2001); and anti-hypertensives such as Norvasc
(sales of $3.6 billion), Cardura ($552 million), and Accupril ($605 million).

Infectious Diseases: This segment comprised Zithromax broad-spectrum quinilone
antibiotic ($1.5 billion); anti-fungals Diflucan ($1.1 billion) and Vfend; and protease
inhibitor Viracept for the treatment of HIV/AIDS ($364 million).

Central Nervous System: This segment included Zoloft anti-depressant ($2.4 billion);
Neurotonin anti-convulsant ($1.8 billion); Aricept, the world’s leading medicine for
Alzheimer’s, which was co-promoted with Eisai Co. Ltd; and Geodon, a new treatment
for schizophrenia ($150 million).

Arthritis: This segment included Celebrex and Bextra, co-promoted with Pharmacia.

Urogenital: This segment sold Viagra ($1.5 billion).

Allergy: This segment sold Zyrtec, the most widely used second-generation antihistamine
worldwide ($990 million).

Diabetes: This segment featured Glucotrol XL and Exubera.
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
Respiratory Diseases: This segment included Spiriva, a one-day inhaled treatment for
congestive obstructive pulmonary disorder, then in an advanced stage of regulatory
review in Europe.

Metabolic Disorders: This segment sold Lasfoxifene for osteoporosis, then in Phase 2
studies in the United States.
Pfizer had built the world’s largest biomedical research and development organization to support
its commitment to innovation, the major driver of the company’s remarkable growth. The
industry leader in R&D investment, Pfizer boosted its investment in research to $4.87 billion in
2001, a 347% increase over the past 10 years, with plans to increase research investment to over
$5 billion in 2002. The Warner-Lambert acquisition allowed Pfizer to build on its significant
advantage in research both by adding thousands of researchers and by providing expertise in
several new areas: Pfizer’s library of compounds effectively doubled, substantially increasing the
likelihood of drug discovery. At the beginning of 2002, the company had 94 new compounds in
development, together with 68 projects devoted to expanding the uses of current drugs, for a total
of 162 ongoing projects. Pfizer’s strong research focus positioned the company to successfully
respond to patent expiration and challenges from generics by extending the life of existing
products via formula or compounding modifications or conversion to over-the-counter (OTC)
products.
Pfizer’s focus on R&D was matched by an equally strong emphasis on marketing. The company
promoted its human pharmaceutical products to health care providers, including doctors, nurse
practitioners, physician assistants, pharmacists, pharmacy benefits managers (PBMs), and
managed care organizations (MCOs). Pfizer also promoted its products directly to consumers in
the United States via direct-to-consumer (DTC) print and television advertising. Pfizer had
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responded to the Food and Drug Administration’s (FDA’s) 1997 decision to loosen restrictions on
DTC advertising of prescription drugs by increasing DTC promotional spending each year.
Prescription pharmaceutical products in the United States were sold principally to wholesalers but
were also sold directly to retailers, hospitals, and clinics. During 2001, sales to Pfizer’s three
largest pharmaceutical wholesalers as a percentage of revenue were:
McKesson, Inc.
14.6%
Cardinal Health Care
13.4%
AmerisourceBergen Corporation
13.0%
Pfizer’s strong marketing and sales operations had enabled the company to become the partner of
choice for the marketing of innovative products developed by others. Pfizer had been extremely
skilled in creating alliances with other pharmaceutical companies via co-promotion agreements.
Through co-promotion and licensing agreements, Pfizer had promoted and marketed such highly
promising products as Celebrex, Bextra, and Aricept with alliance partners by providing cash,
staff, and other resources to further develop, market, promote, and sell the products in exchange
for a share of revenues.
Other alliances included a partnership with IBM and Microsoft to create Amicore, an independent
company that was developing practice management systems; and a chronic disease management
program developed with the State of Florida’s Agency for Health Care Administration.
Pharmaceutical revenue increased 13% in 2001, to $2.6 billion, reflecting market share growth in
both proprietary and alliance products. Revenues of $8.7 billion for the third quarter of 2002
were up 12% over the same quarter in 2001. Eleven products - Lipitor, Norvasc, Neurotinin,
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Viagra, Zoloft, Celebrex, Bextra, Geodon, Aricept, Zyrtec, and Diflucan - representing 82% of
Pfizer’s human pharmaceutical revenues, grew a combined 17%. Reported third quarter 2002 net
income for the company as a whole increased 12% over the same quarter in 2001. Complete
financial information (annual reports, 10 K forms) is available from the company’s website,
www.pfizer.com, www.FreeEdgar.com, or www.WSJ.com.)
Estimated market shares of the 10 largest global pharmaceutical companies at the end of 2001
were:
Ranking
Company
Estimated Market Share (%)
1
Pfizer
8.2
2
GlaxoSmithKline
6.9
3
Merck & Co.
5.4
4
Pharmacia
5.3
5
AstraZeneca
4.4
6
BMS
4.1
7
Novartis
3.9
8
Johnson & Johnson
3.8
9
Aventis
3.7
10
Wyeth (AHP)
3.5
Animal Health
Pfizer’s animal health unit marketed one of the largest-selling and broadest product lines in its
field, selling more than 240 livestock and companion animal products directly to veterinarians,
livestock producers, and distributors. Principal products included Rimadyl, for canine arthritis;
Revolution, the first FDA-approved topical medicine to kill fleas and ticks and control earmites,
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hookworm, and roundworm in dogs and cats; and Dectomax, a treatment for internal and external
cattle parasites. Other products included vaccines and antibiotics. In 1995, Pfizer acquired
SmithKline Beecham’s animal health business, the largest acquisition in Pfizer’s history to that
point, and one that enabled Pfizer to become a major competitor in the animal health segment.
Animal health sales in third quarter 2002 increased 10% to $280 million, compared to the same
period in 2001. This solid performance was led by the strong growth of companion-animal
products Revolution, Rimadyl, and Clavamox/Synulox and of Pfizer’s livestock medicine
RespiSure/Stellamune.
Consumer Health Care
Pfizer Consumer Health Care (CHC) was one of the world’s largest providers of OTC medicines.
CHC’s largest product line was Listerine, the best-selling therapeutic mouthwash in the world.
Other well-known brands included Ben-Gay and Desitin ointments, Sudafed and Benadryl cold
medications, Lubriderm, Neosporin, Rolaids, Efferdent, and Unisom sleep aids. Pfizer expected
CHC to serve as a vehicle to extend the commercial life of medicines going off patent, whether
Pfizer drugs or those of other pharmaceutical companies.
Confectionary Products
The Adams confectionary business, acquired by Warner-Lambert in 1962, became a Pfizer
business segment in the Warner-Lambert acquisition. Headquartered in Parsippany, New Jersey,
Adams was one of the world’s largest providers of confectionary products, with such brands as
Halls, Trident, Dentyne, Chiclets, Certs, Clorets, Bubbaloo, and Bubblicious. Adams distributed
confectionary products in more than 70 countries. In late June 2002, Pfizer announced that it
would explore strategic options for the Adams confectionary business and the Schick-Wilkinson
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Sword shaving products business, including possible sale of both businesses. The company
reportedly received bids from Cadbury Schweppes PLC and Nestle SA for its Adams
confectionary business during the 2002 third quarter; however, no definitive agreement for sale
had been reached as of late 2002.
Shaving Products
Pfizer entered the shaving products business with its 2000 acquisition of Warner-Lambert. This
division manufactured and marketed Schick and Wilkinson Sword razors, which collectively held
the number two market-share position worldwide. While there had been some expressions of
interest from competitors in acquiring this unit, as of early November 2002, Pfizer had received
no firm offers.
Tetra
Tetra was the world’s leading provider of products for the ornamental fish food market, including
TetraMin fish foods and other fish care products. Tetra was the only brand name synonymous
with ornamental fish-keeping. Founded by Dr. Ulrich Bensch in Mele, Germany, Tetra pioneered
the development of flake fish foods. Dr. Bensch sold his company, Tetra Werke, to WarnerLambert in 1974. Now a division of Pfizer and headquartered in Morris Plains, New Jersey,
Tetra had approximately 700 employees and contributed $181 million to Pfizer’s $32.36 billion
2001 revenue. In a further move to remain focused on its core pharmaceutical businesses, Pfizer
announced on November 6, 2002, that it would sell its Tetra aquarium and pond supply business
to the Triton Fund, a private equity European investment fund, for $238.5 million. Acquisition of
diversified pharmaceutical companies followed by divestiture of non-core businesses was not a
new strategy for Pfizer; the company had divested 15 divisions over the previous 10 years that did
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not fit with the company’s mission and strategies. For example, Pfizer divested the Food Science
Group, a segment that manufactured food additives, in 1996 and sold the Medical Technology
Group in 1998 in order to exit the medical devices business.
The Pharmacia Acquisition
On July 15, 2002, Pfizer announced that it would acquire rival and marketing partner Pharmacia
in a tax-free stock-for-stock transaction valued at $60 billion. Already the leading pharmaceutical
company in the United States, Pfizer with Pharmacia would move from fourth to first in Europe;
from third to first in Japan; and from fifth to first in Latin America in pharmaceutical sales. The
acquisition was expected to enhance Pfizer’s already formidable scale economies, strengthen
Pfizer’s research capability (the combined research spending of the two companies was expected
to exceed $7 billion per year), and expand the company’s presence in major therapeutic
categories. One of those categories was cancer drugs, one of Pfizer’s few weaknesses; Pharmacia
made the chemotherapy treatment Camptosar. Pfizer and Pharmacia were already alliance
partners that had worked together effectively to market the COX-2 products Celebrex and Bextra.
The deal would give Pfizer an estimated 14% of the U.S. prescription drug market and 14 number
one drugs. Pharmacia, which started as a Sweden-based company, merged with U.S. drugmaker
Upjohn in 1995 to form Pharmacia & Upjohn. After the Monsanto merger in 2000, the company
changed its name to Pharmacia. The Pfizer acquisition did not include Pharmacia’s 84%
ownership interest in Monsanto, which would be spun off separately to Pharmacia shareholders.
Problems and Challenges
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Pfizer was the subject of a number of investigations, lawsuits, and negative press incidents:

On November 6, 2002, the United Kingdom’s Appeal Court upheld government
restrictions on the supply of the anti-impotence drug Viagra to patients of the National
Health Service (NHS). Pfizer had appealed a High Court decision endorsing the
restrictions, arguing that it was illegal for U.K. Health Secretary Alan Milburn to keep
Viagra on a list of drugs that doctors could prescribe only in a clearly defined
circumstance, which, for Viagra, would be impotence. Milburn said that the restricted
supply of Viagra cost the cash-strapped NHS ₤25 million per year; an unrestricted supply
would increase the cost to ₤125 million. The government noted that if Viagra were made
freely available, funds would have to be diverted from the treatment of other conditions
such as cancer, heart disease, and mental illness.

In 2002, Attorneys General in 47 states were investigating whether the company illegally
marketed the epilepsy drug Neurotonin. Both civil lawsuits and separate criminal
investigations alleged that Parke-Davis and its parent company, Warner-Lambert,
illegally influenced and paid kickbacks to doctors to prescribe Neurotonin for conditions
for which the drug was not approved, going so far as to have advertising agency
employees make joint sales calls with company sales representatives. According to the
suits, about three-quarters of Neurotonin prescriptions nationally were written for offlabel uses, pushing sales to $1.75 billion in 2001. Pfizer had declined to comment but
had denied the allegations in the past.

On October 29, 2002, Pfizer agreed to pay $49 million to settle allegations that the
company defrauded the Medicaid health care program by overcharging the government
for the cholesterol drug Lipitor.
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
In 2002, Pfizer was the target of over 2,000 suits involving Rezulin, a diabetes drug
developed by Sankyo in Japan and by Warner-Lambert.

In 2002, the company was involved in patent litigation with generic drug manufacturers
for a number of its marquee pharmaceuticals, including Zoloft, Diflucan, Neurotonin,
Procardia XL, and Celebrex.

Thirty Nigerian families sued Pfizer in U.S. Federal Court in August 2001 for damages in
what the suit claimed was an unethical clinical trial of the antibiotic Trovan conducted on
children with bacterial meningitis. Pfizer had a mixed record of philanthropy in Africa.
The company had been widely praised for its donation of millions of doses of Zithromax
to treat trachoma, a common cause of blindness; however, Pfizer’s donation of Diflucan
to South Africa to treat some AIDS-related infections had left the company open to
criticism from those who charged that it both placed too many restrictions on how the
drug was to be used and failed in its moral obligation to lower the price of the drug
overall.
The Industry
In the United States, the largest segment of the global pharmaceutical market, demographic
trends, including the baby boom population bulge and longer average life spans, were driving
industry growth. Although approximately 12% of the U.S. population was over 65 years of age,
in 2002 over 33% of all U.S. prescriptions were written for those over 65. Patients generally
considered prescription medicines necessary purchases, which, together with a third-party
payment system, tended to reduce the price elasticity of demand.
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Despite near-term uncertainties with respect to pricing and patent expirations, the pharmaceutical
industry was still one of the healthiest and widest-margin industries in the United States.
Continuing consolidation, driven in part by the need to develop a strong pipeline of potentially
profitable drugs, had intensified competition both within the United States and globally. U.S.
prospects for the longer term were enhanced by demographic growth in the elderly segment of the
population (accounting for about one-third of industry sales), as well as by new therapeutic
products resulting from discoveries in genomics and biotechnology. However, drugs generating
over $40 billion of industrywide sales in 2001 had lost or were going to lose patent protection
over the next three years. The flood of patent expirations offered major opportunities for generics
manufacturers, especially for those obtaining 180 days of “first to file” marketing exclusivity.
On the regulatory front, the FDA had become much tougher on new drug approvals: Regulatory
compliance was costly both in out-of-pocket application, establishment, and product fees and in
time required to gain approval. Major new drug therapies took an average of 14 years to develop,
at an estimated cost of $500 million. Only about 1 applicant in 20 made it through Phase 3 trials
to FDA approval. The FDA was also cracking down on drug manufacturing, with some plants
closed as a result of quality problems.
Four key developments were expected to act as a ceiling on profits for pharmaceutical firms: (1)
managed care plan buyers, who accounted for 70.4% of prescription drug purchases, had made
drug cost containment a priority; (2) the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was being enacted; (3) states had become very aggressive in pushing
for new legislation aimed at obtaining greater drug discounts for Medicaid and other state-run
programs; and (4) prescription drugs were increasingly being purchased from outside the United
States, especially purchases from Canada and Mexico and via the Internet. Many HMOs were
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using a three-tiered copay system to discourage the use of expensive drugs and encourage the use
of generics.
Outside the United States, the competitive landscape was quite different. Although the
standardization of regulatory requirements among European Union (EU) member countries was
expected to create a simpler operating environment, the EU imposed stringent price controls and
banned most DTC marketing; similar price controls and advertising bans existed in Japan. The
operating and competitive environments in developing nations were characterized by a high
degree of uncertainty and, while they represented significant opportunities for revenue growth,
they lacked the strong intellectual property protection pharmaceutical companies relied on to
justify huge investments in R&D.
Recent Developments
A growing challenge to U.S. pharmaceutical firms came from increased out-of-country purchases.
On October 12, 2002, the largest U.S. health insurer informed members of the senior citizens
lobbying group AARP that it would reimburse them for prescriptions filled in Canada and
elsewhere abroad where governments capped drug prices. UnitedHealth Group, Inc., sent a letter
about the coverage to 97,000 people who bought insurance with a drug benefit through AARP.
Although buying prescription drugs outside the United States for use in the country violated
federal regulations, it was a growing practice among older Americans seeking relief from highpriced name-brand drugs. UnitedHealth and AARP appeared to want to keep the announcement
low key; however, thousands of AARP members, as well as other senior citizens, regularly
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purchased prescription medicines in Canada and Mexico - in person or via the Internet - where
the drugs were significantly cheaper, even if not reimbursed.
In early October 2002, the U.S. Office of the Inspector General warned drug companies that
offering incentives, such as concert tickets and vacations, to physicians could lead to civil or
criminal charges. The draft policy came after years of concern about drug industry marketing
practices that critics said influenced doctors to prescribe certain drugs, leading to higher costs for
consumers. The draft, which was open for 60 days of public comment, would not bar nominal
cost gifts. However, golf balls or bags emblazoned with company logos, meals other than those
in conjunction with medical education, concert and other entertainment tickets, cash payments,
and a wide range of other incentives would not be allowed.
The draft also prohibited drug companies from reporting average wholesale prices that differed
substantially from what was actually charged - and touting those prices in marketing. The
government’s concern stemmed from the use of average wholesale prices in determining
reimbursement for the drugs Medicare then covered. There was some concern that if drugs were
sold to doctors for less, doctors would bill for the higher amount and keep the difference. Critics
said it was a tactic drug makers were using to lure doctors to their products and further inflate
consumer drug costs by more than $1 billion annually.
To continue generating the returns enjoyed by the industry over the past decade, pharmaceutical
companies would be forced to rethink how they would identify and exploit opportunities to gain a
competitive edge in an increasingly complex market.
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