Pfizer Inc. (PFE) CEO Albert Bourla Presents at 37th Annual J.P. MorganHealthcare Conference (Transcript)
Jan. 7, 2019 2:43 PM ET
CompanyParticipants
Albert Bourla -Chief Executive Officer
Mikael Dolsten -President, Worldwide Research and Development
Conference CallParticipants
Chris Schott -JPMorgan Securities LLC
Chris Schott
Good morningeverybody. I'm Chris Schott, pharmaceutical analyst at JPMorgan and it's mypleasure today to be hosting a fireside chat with Pfizer. From the company wehave 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&Dorganization. Before kickoff, I do want to mention this housekeeping item, wewill not be having a breakout session after this, so we're just going to do thefireside.
And with that,maybe first question for Albert, given this is your first major presentation toinvestors as CEO maybe share your vision of the growth potential for Pfizer andwhat we can expect under your leadership?
Albert Bourla
Thank you, Chris.Happy New Year to all. I hate to interrupt but before I start I would like toremind you this presentation may contain forward-looking statements, please seeour SEC filings. They made me do it.
Before I go intowhat is changing with Pfizer basically, let me remind that myself as Mikael asothers we were pivotal members of Ian's leadership team. So I was[indiscernible] during Ian's period hoping for a reason and hoping with ussaving big part of it. Things are changing in Pfizer now, but not because theleader is changing. In fact, things are changing because the previous leaderwas very successful.
Things arechanging because the situation is very different. When Ian took over in 2010Pfizer was facing the largest, the biggest LOE challenge in the history of theindustry. Our revenues in 2010 were $62 billion and five years later in 2015were down below $50 billion. At the same time, the productivity of our researchorganization the first decade of the millennial was not that strong and so as aresult what was coming in was not enough to offset what was going out. Sothat's the big decline the stiff CAGR decline.
Unfortunate nowthat 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 sixmonths at the end of June, and following that we have a virtual LOE free perioduntil 2026 that is a very small one in the middle of our period but will notmove the needle. So Lyrica will affect this year's growth because we will havehalf year LOE compared to no LOE in 2018 and will affect 2020 because we willhave no LOE compared to half year.
Full year LOEexclusion compared to in 2020 compared to half year LOE in 2019. But at thesame time, we had a very good productivity in the second decade of thismillennial in terms of R&D and right now we feel that our pipeline is atthe best shape we ever had. So the combination of those two we think willposition Pfizer post Lyrica LOE into a very strong top line growth company.
I don’tunderestimate the challenges that there would be of course headwinds like thepricing pressures that the entire industry is facing. But bottom line I believethat in this new environment with price pressures companies that will be ableto deliver breakthrough medicines that society needs still will thrive. Thosethat do not [indiscernible].
So with that inmind, the new name of the game for Pfizer in the years to come is top linegrowth and I would like to remind everyone two things that are relevant withtop line growth in our industry. The first is that in an industry with thisROIC and in an industry with these type of margins, top line growth can mean onlyone thing in bottom line growth, leverage.
The second thingthat I would like to remind is that in the new environment of healthcare andpharmaceutical market, the only way for a pharmaceutical company to grow topline is to do two things; bring breakthrough medicines to patients thatsignificantly improve the current standards of care. Mediocre or incrementalinnovation is not going to be rewarded the way that it used to be rewarded inthe past.
The second thingthat needs to be done is that we need to reinvent business models so that wecan allow access to people that do not have now. With all of that in mind ourstrategy to achieve this top line growth can be simplified into three words;Innovating For Growth. And when I say innovating I mean both, scientificinnovation and everything that we need to do to ensure that we bring to themarket breakthrough medicines more than our fair share of our research budgetand capabilities. And the second it is commercial innovation, what we need todo to make sure that we are addressing access, affordability, and costpressures coming from the overall healthcare system cost.
Underneath ofcourse will be a lot of sub ledger details. There are things that we need to dowith capital allocation and I believe next year we'll have a very drasticreallocation. We are budgeting to have a very drastic reallocation of ourexpense base into very different areas. We need to organize ourselves in a verydifferent way so that we can maximize the growth potential.
We need to makesure that we change the way that we operate so that we can remove bureaucraticprocesses. Innovation and bureaucracies like water and oil they don’t mix welltogether. And of course we need to make sure that we evolve our culture as anorganization from a culture that was managing decline to a culture that canoptimize growth.
Chris Schott
Very helpful. Youmentioned innovation and I know you've highlighted a new kind of drug candidate– pipeline about 25 candidates pending, 15 of which could have blockbusterpotential. 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 whatare you most excited about at this point?
Albert Bourla
Maybe I'll startby saying what excites me the most, but then I will ask Mikael to add all thesedetails since most of the pipeline is his baby or his babies. I think the factthat mostly makes me comfortable with this pipeline is the fact that it is verydiverse and very large. I would feel more nervous if our growth trajectory wasbased on the success of one or two franchises. But right now, there arefive-six therapeutic areas with each one of them with significant blockbusterassets underneath.
When we put out alist we said that we had up to 25 potential approvals by 2022 and we said 15 ofthem they have blockbuster potential and we – speaking about blockbusterpotential we define it as above $1 billion of annual revenues. And they arespread with oncology, with rare diseases, with vaccines, with internalmedicine, with immuno-inflammation and we have also anti-infectives with thehospital business unit that now we have created. So this is what excites me themost. And maybe Mikael, you can give more specific details in each one of theseareas.
Mikael Dolsten
I'm happy to dothat, thank you. We are very excited in the R&D organization with Albert'svision and organizing for growth platform for the company and clearly a hugeopportunity with the pipeline and partnering as we all hear to add on to it. Sofor 2019 we see three blockbuster type approvals and in near term potentialI'll start with tafamidis for rare disease cardiomyopathy transformative drugwhere we have our filing is accepted by FDA under priority review breakthroughstatus with action date of July.
We have Bavencioand Inlyta, the first TKI immuno-oncology combination also in preparation forfiling breakthrough designation. And finally we have a biosimilar bundle withfour high value biosimilars that all have potential registration opportunitiesthis 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 fromtanezumab, our pain drug followed by JAK1 from our JAK platform in atopicdermatitis [indiscernible] pivotal readout this year also for rare disease.
And then next yearwe have the big opportunities to expand in oncology in non-metastatic diseasereadouts for [indiscernible] and prostate for non-metastatic cancerhormone-sensitive with Xtandi and finally the CD vaccine also big readout nextyear.
Chris Schott
Great, great, sothere's lot going on. And maybe digging a little bit into maybe first ontanezumab, 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'llstart there and there a few safety questions we can dig into after that?
Albert Bourla
Look, I mean,tanezumab I think that the profile of tanezumab it is a very good one. This isbased on what we know so far. We need to wait and see of course the results ofthe remaining pivotal studies. But I think there would never be a better timeto bring to the market a non-addictive, non-opioid therapeutic option thantoday. So with that in mind, I think that pending the results and pending goodlabels this could be a very significant product.
Chris Schott
When I think aboutit, it seems like rapidly progressing arthritis is kind of the key concern withthis can you just give us some color on what you believe would be acceptablerates of that signal as we think about the remainder of the Phase 3 as beingunblinded over the next few months?
Mikael Dolsten
Happy to add tohow Albert describes tanezumab as a major opportunity for novel improvedbenefit to risk treatment for pain and specifically rapidly progressive OA. Ialso wanted to underline that of course we'll learn much more. We have a numberof studies coming, but so far we saw very robust efficacy across all endpointsthat provide I think very compelling benefit versus alternatives; every year tensof thousands Americans are dying because of prescription opioid overdose ormisuse and we spend tens and tens of billions in society because of the impactof those drugs.
The rapidlyprogressive OA was seen in 1.3% of the treated patients, these were prettyadvanced patients that were not suitable or had declined from other painmedications and were in a very much urgent need of pain medications. And indeedmore than half responded with 50% or more reduction in pain by tanezumab. Ofthose 1.3% that had rapidly progressive OA, actually the majority of them havemild-to-moderate radiological change with mainly narrowing of the joint spaceand a minority had structural changes.
So we think thatwould be a compelling benefit to risk for patients that had few othermedications. However, we need obviously to wait for the readout to fullyunderstand the profile which is coming over the next few months from a numberof trials in OA and chronic lower back pain.
Chris Schott
And so the lastquestion is do you feel you have visibility with FDA when you see the data tounderstand if you kind of hit the right targets or it is just going to be somesort of negotiation with the agency depending what we see on that, that rapidlyprogressing OA?
Albert Bourla
I think as alwaysan agency want to see the totality of the data. We think the drug if theprofile continues to be as compelling would be a very important new medicalentity in pain treatment. And we think that the way to monitor these things arepretty standard in healthcare system like standard x-ray.
Chris Schott
Okay, great. Maybepivoting 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 thisproduct help us to set some expectations. This is a product that you feel we shouldthink about launching quickly or is there going to be an education process andone that could have maybe more of a gradual ramp obviously huge end market andlonger term growth opportunity, but just how do we think about the rollout of aproduct like that?
Albert Bourla
No, it's a fairquestion. The first thing that comes to mind for the rollout of a product likethat it is that is addressing a disease that is fatal. People that arediagnosed with this disease, they have life expectancy that is in few years andit's not in pain, I mean it's four or five years and the efficacy of theproduct both in reducing mortality and hospitalization rates was significantand meaningful, not only statistical significant but also meaningful, so that'sone. The second that we need to understand it is that we study more and more ofthis disease and the disease, it is a rare disease, it's very clear.
Now it is a raredisease that it is severely under diagnosed at the same time. And one of thereasons why it was so significantly under diagnosed was that until now therewas no treatment. I think what brings to mind it is the example with the ALKmutation and the ALK treatments. The ALK mutation when the first treatment cameinto the market which was Xalkori was virtually non-diagnosed, right? It wasmaybe 1% to 3% and it took a lot of time until we bring the diagnosis ratethrough what it is today which is in very high level, virtually 80% of thepeople, 90% now I think we are approaching, will make a test if they have lungcancer fallout and the reason was because there is a medication.
The good news isthat us as a company we have a very good track record on educating markets andcreating markets through the educational efforts. We have done it from Lipitorages through the ALK coming now, but also we know that takes time to comestraight to your question. So it's not going to be that immediately. Themedical habits will change, but I have high certainty that it will changewithin let's say a reasonable period of time.
Chris Schott
Okay and then canyou comment on pricing yet for tafamidis or is it too early?
Albert Bourla
I think it is tooearly. We are looking at that of course already now and we are discussing. Wetry to understand the disease and the value that the medicine will bring asalways. The method that we're using to price our products it is we price themcompared to the value that they bring to the healthcare system, so it's earlyto go into more specifics.
Chris Schott
Okay and one morein rare disease, beyond tafamidis what should we be watching for next as wethink about Pfizer's pipeline in rare disease and gene therapy?
Albert Bourla
I will ask Mike tocomment and I can take a bet he will speak about gene therapy, but Mike?
Mikael Dolsten
Yes, you're righton there and it's been a privilege working with Albert together to build up atPfizer gene therapy platform that I think is industry leading from researchexpert to pharmaceutical sciences and manufacturing that allow us to have anend-to-end capability and be a partner of choice for many companies. We havecurrently 10 gene therapy programs of which three are in the clinic. Factor IXwith Spark is now in pivotal study and we're generating in ‘19 early data fromthe higher dose cohort of Duchenne muscular dystrophy gene therapy and also forFactor VIII [ph] therapy together with Sangamo and I'm encourage at what I'veseen so far from both of those trials. These are potentially verytransformative therapies with a single infusion approach.
Chris Schott
Excellent. Albertand you've talked about incremental R&D spend supporting the pipeline, aswe think about the near term P&L, do you see offsets elsewhere within theexpense space to help absorb some of this step up in spend that you've beenhighlighting?
Albert Bourla
Yes, and I'm sureyou've noticed that I made a comment before that in our operating plan for ’19we will give guidance in a month or so right for this year, but we have drasticreallocation of capital.
Chris Schott
Okay.
Albert Bourla
So it's not onlywhat looks on the surface but also what is underneath, so let me be a littlebit more specific. We already said R&D will go up and they will go upbecause our current pivotal programs are maturing, so they are coming to moreexpensive phases and many new pivotal programs have stopped. But althoughR&D is going up within R&D we have significant control to decline ofthe overhead expenses. Mikael did a lot of rationalization. We consolidatedsome research centers. We focused our efforts in areas that were moreproductive.
So all theincrease and even more will come from projects not from overhead that's withinR&D. Now to offset the cost of R&D we try to hold the SI&A and Isay try to hold because normally SI&A when you are one or two years beforemajor launches and before growth period needs to go up. The way that we try todo it is again it's not what is on the surface what is underneath. We will havesignificant increase in direct SI&A expenses and by direct I mean fieldforces, DTC, consumer advertising or promotions, all of these efforts that willgo up and we will have significant decrease to it at least the same level ifnot more, in indirect SI&A expenses and with that I mean general,administrative management, marketing management, sales management.
We did asignificant exercise this year. We restructured significant the company, wecalled it organizing for growth and we called it organizing for growth becauseI think the fundamental thing in organizing for growth it is where you areplacing your resources, if you want to grow. And we significantly increasedspan of control within the mid level of management but within all, the entireorganization by 2, 3, 4 sometimes increased span of control, how many peopleare reporting to a manager which means that we have much more empoweredmanagers because they have much better, bigger role and it's not only that thiscreates significant savings, but even more importantly I would say this createsbetter simplification.
Because when youhave a lot of fragmentation and many people need to sit on the table to make adecision; it's of course much slower and more difficult and bureaucratic thanif the managers they have much more concentrated roles and this broad roles andresponsibilities. We expect that in ’19 these reallocation will be in theexcess of $500 million as a result of the reductions that we are doing, butthat all will come in our guidance because as I said we are increasing R&Dand we are increasing direct SI&A.
Chris Schott
And just shareyour views on capital allocation, it seems like M&A has been a big theme sofar early this year, but how are you thinking just given where the pipeline isand where your LOEs are residing right now, how are you thinking about capitalallocation and cash deployment priorities from here?
Albert Bourla
Yes, I feel thatwe are lucky because we have a very strong balance sheet and also we have verydisciplined - culture of disciplined capital allocation and I plan to maintainboth 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 thesisright now. It is something that shareholders like and prefer and we are goingto maintain this policy.
Chris Schott
Okay.
Albert Bourla
We also, weannounced that in 2018 we significantly increased our buybacks and this isbecause we did for two reasons; one we truly feel very confident about ourpipeline from our perspective increasing buybacks, it is one investing in ourselvesand also even if you see it from the financial engineering perspective bybuying backs we are able to increase R&D expenses without having the wholeimpact on EPS growth right because we are reducing the earnings per share. Sothat also will continue and the third one of course it is to develop inbusiness development to invest in business development opportunities and wewill continue aggressively to invest in business development.
It is that theneed for Pfizer in the next years is different than the need of businessdevelopment of type of business development activities in the years before. Inthe years before we had an issue with stocks that has been resolved. In theyears before we had an issue with growth, so we were looking to buy revenuesnow or soon because this is what was lacking. Right now we are not in thissituation. Right now we are in a situation that our R&D is very productiveand I feel that mostly R&D type of deals is what we need to enhance evenfurther our pipeline, given that we have higher confidence in our capabilitiesto do it, given that now we have very good focus on R&D.
We have focus onthe six therapeutic areas and so the general theme it is that we are going toinvest in bringing Phase 2, Phase 3 and other assets into the pipeline in thosetherapeutic areas that we know and to master these are the therapeutic areasbecause we know will allow us to make fewer mistakes in selecting. And it willallow us to have better capabilities to develop because we know how to developthose.
That been said, wenever say never. We do have the ability because of our balance sheet to dovirtually any deal that one can think in this industry, but this ability willremain in the next 2, 3, 4, 5, this we'll never lose it right now in theforeseeable future, but right now I feel we have a unique window of opportunityto get it right with our pipeline and the new launches. And that is why I don'twant a destructive deal.
Chris Schott
Excellent. Well itis about time. Thank you so much for the comments and thanks very mucheveryone.
Albert Bourla
Thank you verymuch.
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