When Ian Read, an accountant and company lifer, took over as Pfizer’s chief executive in December

2010, the drug firm was facing the impending patent expiration of Lipitor, the bestselling drug ever
made, and the utter failure of one of the most lavishly funded research laboratories on the planet to
develop much of anything. The stock was suffering, and Read’s predecessor–Jeffrey Kindler, a
bearlike lawyer hired from McDonald’s–had just spent $68 billion to buy rival drug maker Wyeth in a
Hail Mary strategy shift. Now Read had to make it work.

COMPANY AND INDUSTRY BACKGROUND

Pfizer was established in 1849 in Brooklyn, New York by cousins Charles Pfizer and Charles Erhart
with a loan of $2,500 from Pfizer’s father [2]. Today, 167 years later, Pfizer Inc. has international
revenues of $49 billion, which makes it the second-largest pharmaceutical manufacturer in the world
[3]. Despite Pfizer’s success, the company has faced many challenges over the last few decades. The
pharmaceutical industry is heavily influenced by legal, political, and technological forces, and all
indications are that the industry will continue to experience dramatic changes.

Since the passing of the Food and Drugs Act in 1906, the Food and Drug Administration (FDA) has
had regulatory authority over drugs in the United States. The scope of its initial authority was limited
and in 1938 President Roosevelt signed the Food, Drug and Cosmetic Act (FD&C) into law, which
significantly expanded federal oversight of drug manufacturing and marketing [4]. In addition to
granting the FDA authority to mandate pre-market review of drugs, the FD&C also allowed the FDA
to regulate drug labelling and advertising. Then, in 1992, Congress passed the Prescription Drug User
Fee Act, which enables the FDA to collect fees from drug manufacturers to aid in funding the pre-
market review process for new drug approvals [5]. The effect of these reforms was significant
increases in the time and cost for drug manufacturers to bring new drugs to market.

In 2006, a study estimated the cost of bringing a new drug to market was between $802 million and
$2 billion, depending on the type of drug being developed and the number of drugs being developed
simultaneously [6]. The study found that approximately 60% of the total cost of drugs was related to
premarket clinical trials required by the FDA. As inflation, increased regulation, and other factors
have affected the pharmaceutical industry, a 2012 study indicated that the cost per drug for the
largest manufacturers has increased to over $5.5 billion [7]. For Pfizer, the total Research &
Development (R&D) cost for each drug that received FDA approval was $7.7 billion between 1997
and 2011 [8]. The steep rise in development costs has forced many large drug manufacturers –
including Pfizer – to cut R&D budgets in an attempt to control rising costs.

The reduction in R&D funding in reaction to expanding costs has led to stifled innovation and
revealed a crisis looming ahead for many large drug manufacturers in the industry. Not only have
many drug companies’ blockbuster drugs gone off patent in recent years, but the reductions in R&D
spending have resulted in drug pipelines that have failed to produce anything of significant value
[10]. The number of new drugs approved by the FDA per billion dollars of R&D expenditures has
halved every nine years since 1950 [11]. The rapid increase in the cost of drug development and the
reduction in the approval frequency of blockbuster-level drugs has led many industry experts to
largely consider the current, fully integrated business model of large pharmaceutical companies to
be unsustainable.

BUSINESS AND STRATEGIES

Like most large pharmaceutical manufacturers, Pfizer pursues a “blockbuster” business model that is
heavily reliant on its R&D pipeline to consistently develop and launch high volume drugs – drugs
with expected annual revenues of $1 billion or greater [13]. In 2012, Pfizer began restructuring its
operations into a new commercial operating model. Pfizer divested its infant nutrition business for
$11.9 billion and spun-off its animal health unit, Zoetis. Additionally, Pfizer restructured its
operations into two primary business segments: Innovative Products and Established Products.
Pfizer’s Innovative Products business is further divided into the Global Innovative Pharma (GIP) and
Global Vaccines, Oncology, and Consumer Healthcare (VOC) businesses [14]. Ian Read commented
regarding the restructuring: “This represents the next steps in Pfizer’s journey to further revitalize
our innovative core. Our new commercial model will provide each business with an enhanced ability
to respond to market dynamics, greater visibility and focus, and distinctive capabilities” [15]. Exhibit
1 contains some useful financial comparisons between Pfizer’s Innovative Products and its
Established Products.

Innovative Products Business

Global Innovative Pharma (GIP) Business. This business focuses on developing, registering and
commercializing novel, value-creating medicines that improve patients' lives. Therapeutic areas
include inflammation, cardiovascular/metabolic, neuroscience and pain, rare diseases and
women's/men's health, and include leading brands, such as Xeljanz®, Eliquis® and Lyrica®. GIP has a
robust pipeline of medicines in inflammation, cardiovascular/metabolic disease, pain, and rare
diseases [16]. Global Vaccines, Oncology, and Consumer Healthcare Business. This segment consists
of three businesses with the following key elements: 1) poised for high, organic growth; 2) distinct
specialization and operating models in science, talent, and market approach; and 3) structured to
ideally position Pfizer to be a market leader on a global basis [17]. Consumer products include
Advil®, Centrum®, Robitussin®,

Established Products Business

Global Established Pharma (GEP) Business. This area consists of three primary product segments: 1)
PeriLOE products which are losing or approaching a losing position in market exclusivity; 2) legacy
established products in developed markets that have lost market exclusivity and those with growth
opportunities; and 3) emerging market products with growth opportunities such as organic
initiatives, partnerships, product enhancements, sterile injectables, and biosimilars [18]. Examples of
established products include Celebrex®, EpiPen®, Zoloft®, and Lypitor

Pricing Strategy

Pfizer’s and other large drug companies’ revenue growth has been largely dependent on raising the
price of older drugs, particularly those nearing patent expirations. Approximately 34% of Pfizer’s
revenue growth over the past three years has come from increasing prices on existing drugs [19].
Over this period, Pfizer has increased the price of Viagra by 57%, of Lyrica by 51%, and of Premarin
by 41%. A 2013 study by the AARP found that the price of Lipitor rose by 9.3% in the year preceding
patent expiration, and by 17.5% in 2011, the year of expiration [20]. Pfizer is not alone in these
practices. AbbVie and Bristol-Myers Squibb have both been reported as generating a very significant
amount of their revenue growth from price increases. Drug pricing scandals and increased media
and societal attention on drug pricing in general makes Pfizer’s reliance on pricing strategy to drive
top-line revenue growth unsustainable. This is evident in the drug industry’s flat net pricing in 2015
[21].

Growth Strategy

Pfizer has become one of the largest pharmaceutical companies in the world primarily as a result of
aggressive mergers and acquisitions (M&A). Pfizer’s acquisitions have been focused on two main
strategies: expanding its capabilities and acquiring brands with strong revenues. Many of Pfizer’s
acquisitions have provided new capabilities for the organization, such as biologics with the
acquisition of Warner-Lambert in 2000 and biosimilar drugs with the acquisition of Hospira in 2015.
Additionally, Pfizer acquired the rights to the best-selling drug Lipitor in its 2000 acquisition of
Warner-Lambert and the rights to Celebrex and Bextra in its 2003 acquisition of Pharmacia
Corporation. From Pfizer’s press releases and company history, a brief timeline of Pfizer’s major
acquisitions (and divestitures) is outlined below [22]:

2000: Pfizer acquires Warner-Lambert for $90 billion for their biologics and consumer products
portfolio, along with the rights to Lipitor.

2003: Pfizer acquires Pharmacia Corporation for $60 billion and acquires the rights to Celebrex,
Bextra, Detrol and Xalatan.

2005: Pfizer acquires Vicuron Pharmaceuticals for $1.9 billion for their antibiotic research and
development.

2006: Pfizer sells its consumer products division to Johnson & Johnson for $16.6 billion.

2007: Pfizer acquires Coley Pharmaceutical for $164 million for their portfolio of biotechnology,
cancer, and vaccine drugs.

2009: Pfizer acquires Wyeth for $68 billion for their portfolio of biotech drugs.

2010: Pfizer acquires King Pharmaceuticals for $3.6 billion and acquires the rights to EpiPen.

2015: Pfizer Acquires Hospira for $16 billion for their biosimilar and injectable drugs portfolio, as well
as infusion technologies [23].

2016: Pfizer acquires Anacor Pharmaceuticals for $5.1 billion for their topical anti-inflammatory
drugs and acquires the rights to Crisaborole [24].

2016: Pfizer acquires Medivation for $14 billion for its prostate cancer drug Xtandi [25].

Pfizer has attempted unsuccessfully to acquire a foreign drug company and relocate its headquarters

overseas. CEO Ian Read has said numerous times that the company faces a competitive disadvantage
with foreign rivals that have significantly lower tax bills [26]. These sorts of deals are called corporate
inversions – transactions undergone by a U.S. company that moves its tax residence to a foreign
country in order to reduce U.S. taxes [27]. In 2014, Pfizer attempted a merger with rival AstraZeneca,
which faced fierce opposition from lawmakers on either side. In the end, Pfizer walked away from
the $118 billion deal after

rejection by AstraZeneca’s board [28]. In 2016 Pfizer entered into an agreement to merge with
Allergan. The $160 billion deal would have created the largest pharmaceutical company in the world
and would have allowed Pfizer to relocate its headquarters to Allergan's home country of Ireland in
order to take advantage of their lower corporate tax rate [29]. However, on April 4, 2016, the U.S.
Department of Treasury took measures to limit corporate inversions [30]. Previously, a company
realized tax benefits for inversions only when the foreign company would contribute 20% or greater
of the combined company’s assets. The new ruling disregards the last three years of U.S. acquisitions
by the foreign entity when determining the foreign company’s relative size under the combined
entity. The new rule was the predominant factor that caused Pfizer to pay $150 million to walk away
the Allergan deal [31]. Pfizer would not have realized the full tax benefit of the inversion because
Allergan’s relative size would have fallen below the 20% threshold under the new tax rules.

Innovation Strategy

Pfizer has a long history of investing in R&D for the development of blockbuster drugs. However,
many industry experts believe the age of blockbuster drugs has come to an end and that new
blockbusters will be rare [32]. They argue that the opportunities for revolutionary drugs have been
mostly exploited, with very few areas of medicine in which breakthrough drugs can have a huge
impact. In light of industry trends, Pfizer has shifted its strategy of maintaining an industry-leading
drug pipeline from in-house development to being more reliant on strategic partnerships and
mergers and acquisitions. To support its interest in strategic partnerships, in 2004 Pfizer founded
Pfizer Venture Investments (PVI). Its goal is to identify and invest in strategic areas and businesses at
the leading edge of healthcare science and technologies. PVI started with a $50 million annual
budget and was Pfizer’s way of staying ahead of industry trends and investing in companies which
are developing compounds and technologies that will enhance Pfizer’s drug pipeline and help drive
the future of the pharmaceutical industry [33]. In January 2016, Pfizer announced that it would be
expanding its investment strategy to include investments in earlystage scientific innovations in
immuno-oncology, gene therapy, and other cutting-edge fields. Pfizer invested nearly $46 million in
four companies in these fields: BioAtla, NextCure Inc., Cortexyme Inc., and