The Business of Diabetes: Pfizer Pulls the Plug on Exubera

Well, third-quarter earnings are being released en masse this week and next, and among the major drug companies, Pfizer and Lilly are releasing their earnings results today (October 18, 2007).

Pfizer was the first one to release its results, and the company released a bombshell of sorts: they are pulling the plug on Exubera, the inhalable insulin that was released with much fanfare back in 2006! But the company made numerous mistakes in entering a business segment (diabetes) that they knew nothing about, and approached the market with a sense of arrogance that doomed the product.

Pfizer Inc posted third-quarter 2007 revenues of $12.0 billion, a 2% decline from the same period last year. The company's reported net income was $761 million in the third quarter of 2007, a decrease of 77% from the same period last year, primarily reflecting pre-tax charges of $2.8 billion related to the decision to exit Exubera, its inhaled insulin product to treat diabetes.

"We are encouraged by our operating results in the third quarter, and we remain on track to achieve our full-year 2007 revenues and adjusted diluted EPS goals. Meanwhile, we made an important decision regarding Exubera, a product for which we initially had high expectations," said Jeff Kindler, Chairman and CEO. "Despite our best efforts, Exubera has failed to gain the acceptance of patients and physicians. We have therefore concluded that further investment in this product is unwarranted."

"We will work with physicians to transition Exubera patients to other treatment options in the next 3 months. We remain committed to investing significant resources in the development of new and innovative medicines to manage diabetes, including monitoring inhalation technologies and other innovative delivery systems for insulin and other medicines."

Frank D'Amelio, Chief Financial Officer, added, "The Exubera pre-tax charges of $2.8 billion related primarily to the write-off of assets associated with this product, as well as the accrual of other exit costs. More specifically, these charges are comprised of approximately $1.1 billion of intangible assets, $661 million of inventory, $454 million of fixed assets and $584 million of other exit costs."

I was among those who predicted Exubera would fail, and I said it from the beginning (see here for my original post), so this is a vindication of sorts. Back in July, I reported that the manufacturer of the Exubera inhaler was cutting jobs because demand for the so-called insulin bong were far below company forecasts. Prior to that, in May, I reported that Pfizer planned a huge direct-to-consumer advertising campaign that was designed to convince patients, primarily those with type 2 diabetes, that they needed Exubera. But as I noted even then, some Wall Street analysts had started to question whether Pfizer would even recoup the $1.3 billion it spent to acquire the exclusive rights to Exubera, which they acquired from rival Sanofi Aventis. I reported that it was unclear whether marketing alone will be sufficient to overcome the medical, economic, practical and legal concerns that have hurt Exubera.

Specifically, I cited a quote from Merrill Lynch analyst David Risinger, who said "We are not aware of any pharmaceutical product that has ever become a blockbuster that was not endorsed by specialists."

I also noted that our own David Kliff, publisher of Diabetic Investor, a specialist investment data company said "I think Pfizer is on drugs" if it believes it will get $2 billion a year from Exubera. If Pfizer does reach its goal, "I'm going to run down Madison Avenue naked," he said. Kliff believed Pfizer would be lucky if Exubera ultimately did half the business that Pfizer was predicting. Well, it looks like we were right and David will not have to run naked down Madison Avenue! Sorry to disappoint anyone who was hoping to catch him streaking through the streets of Manhattan!

Commenting on Pfizer's performance was Michael Obuchowski, a principal at Altanes Investments LLC in New York who doesn't own Pfizer shares: "This is not a good quarter," he said. "The company is in crisis, and the company is not behaving like they are in crisis. They are not replacing the revenue they are losing."

Pfizer's net income was the smallest since a profit of $301 million in the first quarter of 2005. Excluding costs of the Exubera write-off and other items, Pfizer earned 58 cents a share, beating the 52-cent average estimate of 16 analysts surveyed by Bloomberg.

I will update this posting a bit later today after Eli Lilly releases their results (they release them at 9:00), so please be sure to come back!