StreetTalk: New Sheriff in Town at Pfizer

In case you haven't heard, Jeffrey Kindler, Pfizer's general counsel, is replacing long-time CEO Henry "Hank" McKinnell as the new head of the company. There is a long-range strategy in naming a lawyer to run a drug company and I'll get to that in a moment.

Brian O'Connell

But first, it's worth noting that McKinnell had a target on his back ever since Pfizer revealed his Trump-worthy retirement package, which amounted to a choice between a lump sum of $83 million or an annual pension of $6.5 million.

The wailing and gnashing of teeth reverberated from one of end of Wall Street down to the other, with investors piping hot over giving such a generous package to a CEO who presided over a period of time when Pfizer's stock fell 40%. Over that same period the American Stock Exchange Pharmaceutical index was down about 13%. Pfizer shares have traded in a 52-week range of $26.98 to a low of $20.27 since last December—a black mark against not only the management of the company, but on the highly-paid CEO who investors hold responsible for it.

As one investment wag put it, "It's the equivalent of paying a .220 hitter $10 million a year."

CEO Image: It Means More Than You Think

KINDLER'S LIST

McKinnell also leaves at a time when the cupboard is bare, from a commercial drug point of view. In June 2006, Pfizer's patent on Zoloft expired. The antidepressant drug became a household name across America and it became a cash cow for Pfizer, generating $3.3 billion in 2005 sales. The company is also losing patent protection on two other blockbusters: blood-pressure treatment Norvasc, which had $4.7 billion in 2005 sales, and allergy drug Zyrtec, with $1.3 billion in sales that year.

While new drugs like Exubera and Sutent could eventually reach the billion dollar mark in sales (analysts think they both will) they may not reach the mega-drug status that Zoloft and Zyrtec did, and that could translate into a big drag on the company's bottom line come 2007 and 2008, when generic drug makers make off into the night with much of Pfizer's customer base.

Can naming Kindler as CEO change all that? It's hard to say. Wall Street views Kindler, an ex-McDonalds executive (he ran the hamburger titan's Boston Market chain restaurant unit) as a strategic thinker who can tackle the thorny problems of a lackluster drug pipeline and mount legal battles over patent issues surrounding Lipitor and painkiller Celebrex. That's only going to help.

Kindler's legal background should come in handy on numerous fronts, too. Before going off to the private sector, Kindler made his legal bones at the Federal Communications Commission and then clerked for a judge and for US Supreme Court Justice William J. Brennan, Jr. His first foray into the legal sector came at General Electric, where he was Jack Welch's right-hand legal man. Kindler squashed a price-fixing indictment involving GE and diamond seller De Beers, with the presiding judge tossing out the case a mere six weeks into the trial after Kindler made mincemeat out of the prosecution's witnesses on the stand. GE insiders say it was one of Jack Welch's favorite moments during his highly prominent tenure as CEO at GE.

That's crisis management at its best—a trait that the Pfizer board must have surely considered before tapping Kindler to the post. After all, crisis management is one of the first "red flags" that shareholders look for in an effective CEO. And pleasing the shareholders is, fairly or unfairly, job Number One for any CEO—from biotech companies to ball bearing makers.

Kindler gets it. One of his first comments to the press was targeted right at company investors and potential company investors.

"We will transform virtually every aspect of how we do business, focusing on actions that create and sustain value for our shareholders" Kindler said. He added the company will "pursue a broader portfolio of opportunities, including biologics, oncology medicines, potential new treatments for Alzheimer's disease and even vaccines."

Part of that plan will be for Kindler to follow through on last month's deal to sell Pfizer's consumer products division to Johnson & Johnson for $17 billion. That should give Pfizer some financial wiggle room as it sorts out its pipeline issues. Deals to sell other operations this year and next should add more cash to Pfizer's financial arsenal—about $34 billion or so.

While Pfizer will continue to depend on established drugs like Lipitor (analysts estimate $13 billion in sales from the cholesterol drug in 2006), the added cash will buy the company some much needed time and address Wall Street's cry for new drugs to take the place of the expiring old ones. Kindler can help right away by applying his legal smarts to the patent protection process and to the regulatory approval process. In other words, expect to see Kindler lobbying for more lax regulations on C-SPAN during the next several years.

AN INDUSTRY LOOKING FOR CRISIS MANAGERS

In broader terms, it's becoming increasingly apparent that Pfizer will be among the first of many pharmaceutical firms to begin bringing in hands-on lawyer types who know patent law, know drug side effect issues inside and out, and know how to work with federal regulators. Gone will be the days of hiring academics, scientists, and marketing gurus as CEOs.

It's a new reality for drug companies and the board of directors at Pfizer should be given credit for recognizing it first.

The game is changing in the biosciences market and, as usual, the money changers realize that first. No longer can drug companies afford to prop up loyal company lifers who don't know the difference between patent protection and patent leather shoes.

That's not to knock McKinnell directly, because patent and regulatory issues aren't his bread and butter. But it had better be for a new generation of CEOs who have to grapple with management issues that transcend simple market share and matrix management strategies.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901, 267.880.3144, fax 267.880.1939, brian.oco@verizon.net