Back in 1989 Pfizer was a mid-tier pharmaceutical company with total revenues of $5.1 billion. Pfizer PFE +0.79% had come off a decade of modest growth, but internally the company was very optimistic. This optimism was fueled by the rapid launch of what was termed inside of Pfizer as the "big 5": Norvasc, Zoloft, Zithromax, Diflucan, and Cardura. In 1996, Pfizer launched Viagra and signed a co-marketing agreement with Warner-Lambert for Lipitor. The cumulative effect of these products was tremendous and literally transformed Pfizer into a major global corporation. By 1999, Pfizer revenues were almost $27 billion. In the 1990s, Pfizer split four times, with a single share in 1989 becoming 18 shares at the end of the decade. It was indeed heady times.
But such growth poses long-term challenges. As shareholders demand continued growth on the order of 10% annually, the internal R&D pipeline is challenged to keep up. It is not as if one can grow R&D and expect an immediate return. Early research investments, particularly back then, would not flower for another 15 years. Thus, to meet its goals of being the world's top pharmaceutical company, Pfizer turned to growth through external acquisitions. With the rapid growth in Lipitor sales, Pfizer merged with Warner-Lambert to gain exclusive access to this drug-a drug whose sales would peak at $12.9 billion. But the Lipitor growth exacerbated the situation; it was hard enough to grow a pipeline which could keep up with the sales growth that Pfizer was achieving. Eventually, Lipitor would lose its patent. How do you replace a nearly $13 billion drug, a drug that by itself had greater sales than most companies? Well, as most know by now, Pfizer went the acquisition route with Pharmacia (2003), Wyeth (2009), Hospira HSP +% (2015), and now Allergan AGN +2.16%.
Is history about to repeat? The growth of Gilead has been even more spectacular. Gilead revenues in 2005 were $2.0 billion. But in 2015, thanks to the launch of its landmark cures for hepatitis C, Sovaldi and Harvoni, Gilead sales were roughly $32 billion. Gilead is now a top ten pharmaceutical company. Yet it is highly unlikely that its internal R&D pipeline has the assets needed to drive the type of growth that Gilead has provided over the last decade. If that wasn't hard enough, Gilead has competition in the hepatitis C space not just from AbbVie ABBV +0.77% but also now with Merck's recently approved Zepatier. Given that Merck has priced its drug at a steep 33% discount to Gilead's drugs, there will be even more pressure on growing revenues.
So, what will Gilead do to inspire shareholder confidence for future growth? Would it consider the "Pfizer script?" Pfizer has certainly laid out the game plan for dealing with such a situation. Furthermore, given the drop in the value of biotech stocks in the last few months, a number of companies may prove to be attractively priced. Will Gilead be willing to undergo the kind of acquisition it needs to continue its remarkable growth? Is there a company out there with the type of blockbuster that Gilead would need to acquire to meet its goals? But, if it starts down this road, will it be able to stop? Pfizer couldn't.