Pfizer Inc. (NYSE:PFE) 37th Annual J.P. Morgan Healthcare Conference January 7, 2019 11:30 AM ET
Albert Bourla - Chief Executive Officer
Mikael Dolsten - President, Worldwide Research and Development
Conference Call Participants
Chris Schott - JPMorgan Securities LLC
Good morning everybody. I'm Chris Schott, pharmaceutical analyst at JPMorgan and it's my pleasure today to be hosting a fireside chat with Pfizer. From the company we have Albert Bourla in his first presentation since becoming the company's CEO; as well as Mikael Dolsten, who is the head of the company's R&D organization. Before kickoff, I do want to mention this housekeeping item, we will not be having a breakout session after this, so we're just going to do the fireside.
And with that, maybe first question for Albert, given this is your first major presentation to investors as CEO maybe share your vision of the growth potential for Pfizer and what we can expect under your leadership?
Thank you, Chris. Happy New Year to all. I hate to interrupt but before I start I would like to remind you this presentation may contain forward-looking statements, please see our SEC filings. They made me do it.
Before I go into what is changing with Pfizer basically, let me remind that myself as Mikael as others we were pivotal members of Ian's leadership team. So I was [indiscernible] during Ian's period hoping for a reason and hoping with us saving big part of it. Things are changing in Pfizer now, but not because the leader is changing. In fact, things are changing because the previous leader was very successful.
Things are changing because the situation is very different. When Ian took over in 2010 Pfizer was facing the largest, the biggest LOE challenge in the history of the industry. Our revenues in 2010 were $62 billion and five years later in 2015 were down below $50 billion. At the same time, the productivity of our research organization the first decade of the millennial was not that strong and so as a result what was coming in was not enough to offset what was going out. So that's the big decline the stiff CAGR decline.
Unfortunate now that I'm taking over a very different situation, in fact, the exact opposite. We are about to face the last LOE challenge that would be the Lyrica LOE in six months at the end of June, and following that we have a virtual LOE free period until 2026 that is a very small one in the middle of our period but will not move the needle. So Lyrica will affect this year's growth because we will have half year LOE compared to no LOE in 2018 and will affect 2020 because we will have no LOE compared to half year.
Full year LOE exclusion compared to in 2020 compared to half year LOE in 2019. But at the same time, we had a very good productivity in the second decade of this millennial in terms of R&D and right now we feel that our pipeline is at the best shape we ever had. So the combination of those two we think will position Pfizer post Lyrica LOE into a very strong top line growth company.
I don’t underestimate the challenges that there would be of course headwinds like the pricing pressures that the entire industry is facing. But bottom line I believe that in this new environment with price pressures companies that will be able to deliver breakthrough medicines that society needs still will thrive. Those that do not [indiscernible].
So with that in mind, the new name of the game for Pfizer in the years to come is top line growth and I would like to remind everyone two things that are relevant with top line growth in our industry. The first is that in an industry with this ROIC and in an industry with these type of margins, top line growth can mean only one thing in bottom line growth, leverage.
The second thing that I would like to remind is that in the new environment of healthcare and pharmaceutical market, the only way for a pharmaceutical company to grow top line is to do two things; bring breakthrough medicines to patients that significantly improve the current standards of care. Mediocre or incremental innovation is not going to be rewarded the way that it used to be rewarded in the past.
The second thing that needs to be done is that we need to reinvent business models so that we can allow access to people that do not have now. With all of that in mind our strategy to achieve this top line growth can be simplified into three words; Innovating For Growth. And when I say innovating I mean both, scientific innovation and everything that we need to do to ensure that we bring to the market breakthrough medicines more than our fair share of our research budget and capabilities. And the second it is commercial innovation, what we need to do to make sure that we are addressing access, affordability, and cost pressures coming from the overall healthcare system cost.
Underneath of course will be a lot of sub ledger details. There are things that we need to do with capital allocation and I believe next year we'll have a very drastic reallocation. We are budgeting to have a very drastic reallocation of our expense base into very different areas. We need to organize ourselves in a very different way so that we can maximize the growth potential.
We need to make sure that we change the way that we operate so that we can remove bureaucratic processes. Innovation and bureaucracies like water and oil they don’t mix well together. And of course we need to make sure that we evolve our culture as an organization from a culture that was managing decline to a culture that can optimize growth.
Very helpful. You mentioned innovation and I know you've highlighted a new kind of drug candidate – pipeline about 25 candidates pending, 15 of which could have blockbuster potential. Maybe just elaborate a little bit more for – both Albert and Mikael, just the state of the pipeline at Pfizer today and within those 25 assets what are you most excited about at this point?
Maybe I'll start by saying what excites me the most, but then I will ask Mikael to add all these details since most of the pipeline is his baby or his babies. I think the fact that mostly makes me comfortable with this pipeline is the fact that it is very diverse and very large. I would feel more nervous if our growth trajectory was based on the success of one or two franchises. But right now, there are five-six therapeutic areas with each one of them with significant blockbuster assets underneath.
When we put out a list we said that we had up to 25 potential approvals by 2022 and we said 15 of them they have blockbuster potential and we – speaking about blockbuster potential we define it as above $1 billion of annual revenues. And they are spread with oncology, with rare diseases, with vaccines, with internal medicine, with immuno-inflammation and we have also anti-infectives with the hospital business unit that now we have created. So this is what excites me the most. And maybe Mikael, you can give more specific details in each one of these areas.
I'm happy to do that, thank you. We are very excited in the R&D organization with Albert's vision and organizing for growth platform for the company and clearly a huge opportunity with the pipeline and partnering as we all hear to add on to it. So for 2019 we see three blockbuster type approvals and in near term potential I'll start with tafamidis for rare disease cardiomyopathy transformative drug where we have our filing is accepted by FDA under priority review breakthrough status with action date of July.
We have Bavencio and Inlyta, the first TKI immuno-oncology combination also in preparation for filing breakthrough designation. And finally we have a biosimilar bundle with four high value biosimilars that all have potential registration opportunities this year. Three more readouts that relates to the list of up to 15 and [five] [ph] that Albert alluded to this year very soon the next study readouts from tanezumab, our pain drug followed by JAK1 from our JAK platform in atopic dermatitis [indiscernible] pivotal readout this year also for rare disease.
And then next year we have the big opportunities to expand in oncology in non-metastatic disease readouts for [indiscernible] and prostate for non-metastatic cancer hormone-sensitive with Xtandi and finally the CD vaccine also big readout next year.
Great, great, so there's lot going on. And maybe digging a little bit into maybe first on tanezumab, just elaborate a little bit more about how you see that opportunity, it's obviously an unmet need, it's very interesting profile, but maybe we'll start there and there a few safety questions we can dig into after that?
Look, I mean, tanezumab I think that the profile of tanezumab it is a very good one. This is based on what we know so far. We need to wait and see of course the results of the remaining pivotal studies. But I think there would never be a better time to bring to the market a non-addictive, non-opioid therapeutic option than today. So with that in mind, I think that pending the results and pending good labels this could be a very significant product.
When I think about it, it seems like rapidly progressing arthritis is kind of the key concern with this can you just give us some color on what you believe would be acceptable rates of that signal as we think about the remainder of the Phase 3 as being unblinded over the next few months?
Happy to add to how Albert describes tanezumab as a major opportunity for novel improved benefit to risk treatment for pain and specifically rapidly progressive OA. I also wanted to underline that of course we'll learn much more. We have a number of studies coming, but so far we saw very robust efficacy across all endpoints that provide I think very compelling benefit versus alternatives; every year tens of thousands Americans are dying because of prescription opioid overdose or misuse and we spend tens and tens of billions in society because of the impact of those drugs.
The rapidly progressive OA was seen in 1.3% of the treated patients, these were pretty advanced patients that were not suitable or had declined from other pain medications and were in a very much urgent need of pain medications. And indeed more than half responded with 50% or more reduction in pain by tanezumab. Of those 1.3% that had rapidly progressive OA, actually the majority of them have mild-to-moderate radiological change with mainly narrowing of the joint space and a minority had structural changes.
So we think that would be a compelling benefit to risk for patients that had few other medications. However, we need obviously to wait for the readout to fully understand the profile which is coming over the next few months from a number of trials in OA and chronic lower back pain.
And so the last question is do you feel you have visibility with FDA when you see the data to understand if you kind of hit the right targets or it is just going to be some sort of negotiation with the agency depending what we see on that, that rapidly progressing OA?
I think as always an agency want to see the totality of the data. We think the drug if the profile continues to be as compelling would be a very important new medical entity in pain treatment. And we think that the way to monitor these things are pretty standard in healthcare system like standard x-ray.
Okay, great. Maybe pivoting to another one of your big growth opportunities, tafamidis, just talk – it's great news on the accepted filing, as we think about the launch of this product help us to set some expectations. This is a product that you feel we should think about launching quickly or is there going to be an education process and one that could have maybe more of a gradual ramp obviously huge end market and longer term growth opportunity, but just how do we think about the rollout of a product like that?
No, it's a fair question. The first thing that comes to mind for the rollout of a product like that it is that is addressing a disease that is fatal. People that are diagnosed with this disease, they have life expectancy that is in few years and it's not in pain, I mean it's four or five years and the efficacy of the product both in reducing mortality and hospitalization rates was significant and meaningful, not only statistical significant but also meaningful, so that's one. The second that we need to understand it is that we study more and more of this disease and the disease, it is a rare disease, it's very clear.
Now it is a rare disease that it is severely under diagnosed at the same time. And one of the reasons why it was so significantly under diagnosed was that until now there was no treatment. I think what brings to mind it is the example with the ALK mutation and the ALK treatments. The ALK mutation when the first treatment came into the market which was Xalkori was virtually non-diagnosed, right? It was maybe 1% to 3% and it took a lot of time until we bring the diagnosis rate through what it is today which is in very high level, virtually 80% of the people, 90% now I think we are approaching, will make a test if they have lung cancer fallout and the reason was because there is a medication.
The good news is that us as a company we have a very good track record on educating markets and creating markets through the educational efforts. We have done it from Lipitor ages through the ALK coming now, but also we know that takes time to come straight to your question. So it's not going to be that immediately. The medical habits will change, but I have high certainty that it will change within let's say a reasonable period of time.
Okay and then can you comment on pricing yet for tafamidis or is it too early?
I think it is too early. We are looking at that of course already now and we are discussing. We try to understand the disease and the value that the medicine will bring as always. The method that we're using to price our products it is we price them compared to the value that they bring to the healthcare system, so it's early to go into more specifics.
Okay and one more in rare disease, beyond tafamidis what should we be watching for next as we think about Pfizer's pipeline in rare disease and gene therapy?
I will ask Mike to comment and I can take a bet he will speak about gene therapy, but Mike?
Yes, you're right on there and it's been a privilege working with Albert together to build up at Pfizer gene therapy platform that I think is industry leading from research expert to pharmaceutical sciences and manufacturing that allow us to have an end-to-end capability and be a partner of choice for many companies. We have currently 10 gene therapy programs of which three are in the clinic. Factor IX with Spark is now in pivotal study and we're generating in ‘19 early data from the higher dose cohort of Duchenne muscular dystrophy gene therapy and also for Factor VIII [ph] therapy together with Sangamo and I'm encourage at what I've seen so far from both of those trials. These are potentially very transformative therapies with a single infusion approach.
Excellent. Albert and you've talked about incremental R&D spend supporting the pipeline, as we think about the near term P&L, do you see offsets elsewhere within the expense space to help absorb some of this step up in spend that you've been highlighting?
Yes, and I'm sure you've noticed that I made a comment before that in our operating plan for ’19 we will give guidance in a month or so right for this year, but we have drastic reallocation of capital.
So it's not only what looks on the surface but also what is underneath, so let me be a little bit more specific. We already said R&D will go up and they will go up because our current pivotal programs are maturing, so they are coming to more expensive phases and many new pivotal programs have stopped. But although R&D is going up within R&D we have significant control to decline of the overhead expenses. Mikael did a lot of rationalization. We consolidated some research centers. We focused our efforts in areas that were more productive.
So all the increase and even more will come from projects not from overhead that's within R&D. Now to offset the cost of R&D we try to hold the SI&A and I say try to hold because normally SI&A when you are one or two years before major launches and before growth period needs to go up. The way that we try to do it is again it's not what is on the surface what is underneath. We will have significant increase in direct SI&A expenses and by direct I mean field forces, DTC, consumer advertising or promotions, all of these efforts that will go up and we will have significant decrease to it at least the same level if not more, in indirect SI&A expenses and with that I mean general, administrative management, marketing management, sales management.
We did a significant exercise this year. We restructured significant the company, we called it organizing for growth and we called it organizing for growth because I think the fundamental thing in organizing for growth it is where you are placing your resources, if you want to grow. And we significantly increased span of control within the mid level of management but within all, the entire organization by 2, 3, 4 sometimes increased span of control, how many people are reporting to a manager which means that we have much more empowered managers because they have much better, bigger role and it's not only that this creates significant savings, but even more importantly I would say this creates better simplification.
Because when you have a lot of fragmentation and many people need to sit on the table to make a decision; it's of course much slower and more difficult and bureaucratic than if the managers they have much more concentrated roles and this broad roles and responsibilities. We expect that in ’19 these reallocation will be in the excess of $500 million as a result of the reductions that we are doing, but that all will come in our guidance because as I said we are increasing R&D and we are increasing direct SI&A.
And just share your views on capital allocation, it seems like M&A has been a big theme so far early this year, but how are you thinking just given where the pipeline is and where your LOEs are residing right now, how are you thinking about capital allocation and cash deployment priorities from here?
Yes, I feel that we are lucky because we have a very strong balance sheet and also we have very disciplined - culture of disciplined capital allocation and I plan to maintain both to start with right. When it comes to more details in capital allocation, we know that growing dividend it is a very big part of our investment thesis right now. It is something that shareholders like and prefer and we are going to maintain this policy.
We also, we announced that in 2018 we significantly increased our buybacks and this is because we did for two reasons; one we truly feel very confident about our pipeline from our perspective increasing buybacks, it is one investing in ourselves and also even if you see it from the financial engineering perspective by buying backs we are able to increase R&D expenses without having the whole impact on EPS growth right because we are reducing the earnings per share. So that also will continue and the third one of course it is to develop in business development to invest in business development opportunities and we will continue aggressively to invest in business development.
It is that the need for Pfizer in the next years is different than the need of business development of type of business development activities in the years before. In the years before we had an issue with stocks that has been resolved. In the years before we had an issue with growth, so we were looking to buy revenues now or soon because this is what was lacking. Right now we are not in this situation. Right now we are in a situation that our R&D is very productive and I feel that mostly R&D type of deals is what we need to enhance even further our pipeline, given that we have higher confidence in our capabilities to do it, given that now we have very good focus on R&D.
We have focus on the six therapeutic areas and so the general theme it is that we are going to invest in bringing Phase 2, Phase 3 and other assets into the pipeline in those therapeutic areas that we know and to master these are the therapeutic areas because we know will allow us to make fewer mistakes in selecting. And it will allow us to have better capabilities to develop because we know how to develop those.
That been said, we never say never. We do have the ability because of our balance sheet to do virtually any deal that one can think in this industry, but this ability will remain in the next 2, 3, 4, 5, this we'll never lose it right now in the foreseeable future, but right now I feel we have a unique window of opportunity to get it right with our pipeline and the new launches. And that is why I don't want a destructive deal.
Excellent. Well it is about time. Thank you so much for the comments and thanks very much everyone.
Thank you very much.