The Unstoppable force vs the Immovable object!
In this corner, 230 lbs (perhaps) of orange fury, gleaming white teeth, and questionable pompadour! Scion of billionaire real estate dynasty, reality show huckster, and master of the 140 word rant, somehow the chosen defender of America’s common man! Ladies and Gentleman, President Donald Trump!
In the other corner, a man who was probably born in a tailored three piece suit! The very face of the corporate insider; a man who has worked at Pfizer so long that underneath that tailored three piece suit you may well find a tattoo that says “property of Pfizer.” An executive whose many battles with politicians and government regulators have left him so slippery, that we may need independent confirmation that he has a backbone at all! Ladies and Gentlemen, Mr. Ian Read, CEO of Pfizer Inc!
Let’s get ready to Rumble…..!!!
Who will win in an epic showdown between these two world class assholes? Why both, of course. With the American consumer likely to be the big loser. We will discuss how you, as a pharmaceutical investor, can come away a winner over the long haul.
Mr Reed came to my attention several years ago when he battled with another presidential administration. Pfizer was at the epicenter of a battle with the Obama administration over the concept of “inversion mergers.” Put simply, this was the idea that an American based company could buy a smaller foreign based company, change a few addresses on its incorporation paperwork, and presto! Magically pay lower taxes because it would now be an irish company, instead of an American company. This attempt to game the system immediatly rubbed me and millions of my fellow Americans the wrong way. In a recent profile by STAT magazine Reed was described as “….a tried and true numbers guy who did not have a feel for the optics, given the attacks on drug companies by the president….” You can say that again!
From his first mention of the idea, to his vigorous attempt at embarrassing Pfizer in the national news, there were a few obvious red flags about Reed’s push to move Pfizer out of the country. First of all, even though it was just an unlucky combination of chance factors, Reed was a foreigner running an American company, and a foreigner inducing an American industrial giant to leave America is just terrible public relations, especially when you are already running a company that America loves to hate. Even people that know very little about stocks, pharmaceuticals, or business recognize the Pfizer name, and are vaguely aware that Pfizer has been based in the American Northeast since 1849. In a bizarre way, the maker of Viagra is as American as apple pie. To suddenly claim that Pfizer is Irish, and should therefore pay much lower Irish taxes, just looks like a bald faced lie. Not helpful when your company is already the punching bag of politicians, courts, and activists everywhere.
Reed, of course, made the argument that Pfizer was constantly playing at a disadvantage to international competitors with lower tax rates, and that as CEO of Pfizer, he had a fiduciary duty to keep taxes as low as possible. Like most of the best lies that corporations tell, this is almost true. Reed has a duty to maximize profit for corporate shareholders. One way to do so would be to keep taxes as low as possible. But you know another, even better way to maximize profits for shareholders? Create new medicines, better medicines, that patients and the American public value! Reed seems to spend so much time plotting international tax acrobatics that he forgot about anything that looks like actual value creation. More on this later.
So, Reed is no stranger to presidential dust ups. By the end of the Obama administration, the millions of dollars and many, many corporate man hours invested in trying to game the tax system were thwarted when congress effectively outlawed the kind of tax move that Reed lusted over. Poor Pfizer. Now the only way to maximize shareholder returns would be to actually take risks, pioneer new medicines, and sell them on the open market like every other business in America. Or was it?
The overall problem with Pfizer is that, to use a technical term, their innovation pipeline sucks. The days of Viagra and Lipitor long behind them, the corporate behemoth has been battered by inevitable patent expirations, and a yawn inducing R&D pipeline. As Stat magazine bluntly put it, “Overall revenue has largely been in a holding pattern the past few years. At $52.5 billion, 2017 sales were essentially flat from the year before and not terribly much from $49.6 billion in 2014….the company doesn’t have a lot of growth prospects. So raising prices is a basic business decision. Reed has certain financial goals to meet and this is one way to deliver to shareholders.” While Reed was busy antagonizing both Democrats and Republicans with his tax avoidance shenanigans, he merely relied on constant price increases to meet financial goals. I guess to some degree it worked. Pfizer share price has doubled from when he became CEO in 2010, and Reed himself has consistently earned between $25,000,000 and $30,000,000 annually, year after year. Who needs innovation when you can just take the sure bet and strangle vulnerable consumers with ever higher prices for the same old drugs?
Enter the Donald. It all started off so well. In many ways, The Donald was Reed’s wet dream come true. Even though the Obama era congress had foiled Reed’s ambition of a lower corporate tax rate by outlawing tax inversions, Trump successfully got the overall American corporate tax late lowered, effectively making America the most competitive place in the world to house a major corporation. Wow! What great news for Pfizer! Right?
Yes, and no. You can tax whatever you want, but risk and reward in R&D and acquisitions is the lifeblood of the pharmaceutical business. If your pipeline is filled with duds and losers, you are still going to be left in the dust by competitors who have spent years worrying about creating new medicines instead of moving the company to Uzbekistan to save on taxes.
So, Reed continued on his standard path of constantly raising prices for the same reason that the mafia does…..because he can. This spelled opportunity for Trump. On July 9th, with 48 hours of Pfizer quietly announcing a 9% price hike on dozens of common drugs, Reed got a taste of the Orange Dragon via Twitter “Pfizer Others should be ashamed that they have raised drug prices for no reason. They are merely taking advantage of the poor others that are unable to defend themselves….we will respond!” Ouch!
Even a cold blooded numbers hound like Reed could understand that this single tweet could have the effect of negating hundreds of millions of dollars that Pfizer spends every year advertising products in an effort to promote Pfizer’s good name. But even more troubling was the explicit threat at the end of the tweet….”we will respond.” Yikes!! Not what shareholders would want to hear. Vague, but menacing. What could it mean?
It turns out that Reed is not the only thug in a tailored suit capable of employing mafia tactics. When Reed was summoned to the White House to meet with Trump regarding the price increases, he may well have attempted to stand up to “President Chaos.” Afterall, there isn’t really much a president can do to bring down specific pharmaceutical prices. After ten years of attempted health care reform, Medicare is still legally forbidden from negotiating with Big Pharma over the prices it pays. Trump himself has weakened Obamacare to the point of near irrelevance. And American Presidents can’t just decree prices that private enterprise will charge….despite all the fretting in the media, we aren’t living in the Congo yet, and Trump has repeatedly had his hands slapped by the courts when he has given in to his more dictatorial tendencies. Reed might have attempted to remind Trump of these facts when they meet in private.
But confrontation with the Orange Dragon would have been most unwise, especially when most Americans would agree that Pfizer was caught sitcking thier hand in the cookie jar. You see, although the Federal government has no direct control over Pfizer, the pharmaceutical business is a heavily regulated affair, with Pfizer needing to peacefully interact with dozens of regulatory agencies on a daily basis. That horde of regulatory federal agencies can respond to Pfizer’s needs quickly, or slowly. The FDA, now headed by Trump right hand man Alex Azar, can cooperate with Pfizer smoothly, or drag its feet and make Ian Reed’s existence a waking nightmare. Of course it would be illegal for an American president to influence regulatory agencies in this way, but this is Donald Trump we are talking here, not Ned Flanders. These are the kinds of veiled threats, made in private meetings, that make men like Reed wake up in a cold sweat. Imagine trying to calculate the shareholder loses caused by a suddenly uncooperative FDA?
No one understands a gangster’s thinking like another gangster, and Reed knew how to put a smile on the freakishly pearly whites of Donald Trump. Trump graced us with this tweet less than 24 hours from his initial salvo at Pfizer, “Just talked with Pfizer CEO and Secretary Azar on our drug pricing blueprint. Pfizer is rolling back price hikes, so American patients don’t pay more. We applaud Pfizer for this decision and hope other companies do the same. Great news for the American people.” The Orange Dragon to the rescue! Once again, Donald Trump exercising his incredible negotiating skill to save the common man from the forces of evil conspiring against him. Trump standing up to corporate evil as only Trump can! A president so powerful that just one tweet reforms Pfizer from its evil ways and turns it into a shining example of good corporate behavior. A big win for the American people……right? Right?
Not so much. The entire affair is a “huuuuuge” win for Donald Trump, because he looks like a highly effective defender of the little guy to the millions of very simple people who struggle with high pharma prices every month. But in reality, as we discussed previously, the American president has very little direct power to influence drug pricing in our bizarro, quasi free market system. There is nothing in the world to stop Pfizer from pursuing the very same “innovation light, price hike heavy” strategy in a more discreet, more tactful way once Trump moves on to bullying Harley Davidson, or some other target of the month. To be fair to Trump, Big Pharma’s influence is so woven into our governmental system that high pharma prices have resisted efforts of almost every type, from every stripe of politician, for decades. At least Trump looks like he cares.
And so does Reed. He inadvertently bumbled into an opportunity to make the President look good. And Trump likes looking good. So that may give Reed and his Pfizer chronies some brownie points with the White House that can be used in back room dealmaking down the road. In the meantime, a clever numbers guy like Reed, with armies of attorneys and accountants at his command, will find some other way to gradually raise prices while not increasing value delivered.
But is this website about preaching? Is this website about moral crusading? No, it’s about making money. Is Ian Reed, “numbers guy” right? If I were a Pfizer shareholder, would I be better off being served by an executive team that takes as little risk as possible, while squeezing valued clients as hard a possible, to constantly yield more profit for shareholders, regardless of whether that extra profit means extra value for patients? Afterall, it certainly has worked for Ian Reed, who has made about $200,0000,000 in his eight years as Pfizer CEO. The stock price has doubled. If we had no soul at all, and just had an excel spreadsheet where our conscience should be, maybe Mr Reed’s way of running a company is the most profitable….?
Not really. While Pfizer’s share price has doubled over the 8 years of Reed’s tenure, shareholders over at Eli Lilly, which has pumped much more money into R&D, have realized a 151% return over the same period. Bristol, Myers and Squibb have seen a stunning 287% return. The S&P 500 itself has delivered a 182% return. In other words, Pfizer has doubled its share price under Reed, which certainly isn’t bad, but the spreadsheet cowboy just happened to wander into the Pfizer corner suite during one of the greatest bull markets in financial history. Ian Reed is a math nerd with astounding good luck.
And his good luck may be starting to run out. Basic common sense dictates that you can’t just randomly raise prices forever without facing consequences. Even sick people who are desperate for relief eventually just run out of money. And its well documented that while Ian Reed has been getting richer and richer over the last decade, the American middle class has been getting poorer and poorer.
The performance numbers bear this out. While Reed can easily defend doubling his corporation’s share price over the last eight years, the more he relies on random price gouging, the farther he falls behind his innovative competitors Over the last five years, Pfizer has returned 55%, while Johnson&Johnson has returned 61%, and Eli Lilly has returned 101%. The S&P 500, has returned 84%. So a grandma who knows nothing at all about stocks, pharma, or business, who had just put her retirement money in a plain vanilla ETF that tracks the biggest corporate names, would have done better than investing with scheming, calculating Mr. Reed. For this he was paid $200,000,000?
What are the concise lessons that us investors can take away from this episode to help us maximize our own profits? Luckily, in this business, the way to really make money over the long run is to deliver value. We can make money hand over fist and still sleep well at night. We just need to focus our investing efforts on finding management teams that put innovation first. We have seen that shareholders can do well for a limited period of time by raising prices, but, as the saying goes, “You can’t squeeze blood from a stone.”
From our point of view, the point of view of the outside investor rather than the corporate lifer, the real big money, the “Mar-a-Lago Money” if you will, comes from choosing management teams that seek to foster sustained competitive advantage over long periods of time. Accountants and tax lawyers are critical team members, but no one ever cured lung tumors with an excel spreadsheet.
As pharma investors, we have a chance to “Do good, by doing well.” Let’s use it.