Pfizer (PFE) plans to lay off 16,300 more employees as it grapples with declining sales of Lipitor, its best-selling cholesterol product, and attempts to meet savings targets promised to Wall Street. Lipitor sales reps will begin to receive phone calls about their fate this week, according to Pharmalot.
Pfizer is also in the process of a massive transfer of wealth from its 23,000 retirees -- and those about to retire in the next few years -- to itself. That has saved Pfizer $534 million in healthcare expenditures and reduced liabilities since 2009.
In its quarterly 10-Q disclosure to the SEC (page 10), Pfizer said that a "cost-reduction and transformation" plan put in place in 2005 has targeted 55,400 jobs, of which 39,100 have been terminated. That means 16,300 are yet to come. The company has spent $856 million on "employee termination costs" this year, up from $576 million through the first half of last year, and $1.9 billion in total costs associated with the company's cost reduction initiatives.
It's all part of CEO Ian Read's promise to investment analysts in June to lop an extra $500 million in savings from 2011 and another $1 billion in 2012.
At the same time, as reported on BNET last week, Pfizer has axed much of its post-retirement health benefits for retirees over the age of 65, leaving them dependent on Medicare.
Pfizer puts on a cap
Those cuts occurred because of a 1993 decision to cap retiree health benefits for many employees of "legacy" companies acquired by Pfizer, such as Monsanto and Pharmacia. At the time, the cap was estimated to be 140 percent of the full cost of insuring a retiree, and Upjohn, one of the companies acquired by Pfizer, told its employees that the cap may become "obsolete" in future due to changes in U.S. healthcare law. Those changes never came, however, and in 2003 Pfizer employees received this memo, telling them the company was "pleased" to announce the cap had been reached and that in 2004 onward they would have to pay a small monthly premium to make up the shortfall.
Over the years, that premium has grown and -- according to emails from former CEO Jeff Kindler and his HR staff obtained by BNET -- now forms the majority of the cost of insuring a Pfizer retiree for one year. This chart shows how the $11,700 that Pfizer pays toward the insurance of a retiree and their spouse is now about half of the actual cost of the insurance, which is $22,028, per Kindler's emails and HR documents obtained by BNET:
An accounting rule?
In the 2003 letter, Pfizer presented the cap as if it were a change in accounting rules that was beyond its control. It said:
In 1993, Pharmacia & Upjohn began complying with a Financial Accounting Standards Board (FASB) rule that changed the corporate accounting procedures for post-retirement benefit expenses other than pension expenses.The rule required companies to accurately accrue anticipated medical expenses for its retiree health benefits. According to the 1993 memo, this "resulted in a decrease of approximately $234 million in our reported 1992 net earnings after taxes." So P&U -- another Pfizer acquisition -- chose to comply with the rule by ending further spending on health benefits.
Pfizer further chose not to add cost-of-inflation increases to the cap as it had been doing until 2004. That saved the company $326 million in stemmed losses to its employee benefit trusts and reduced its post-retirement liabilities by $208 million through 2010, according to page 53 of Pfizer's annual report. Now former retirees are footing half their healthcare bill, and Pfizer gets to keep about $534 million a year it previously promised to spend on its former workers.
The policy is unlikely to be reversed because a federal tax break on prescription drug coverage provided by employers comes to an end in 2013, making employer-based health coverage even more expensive.
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- How Pfizer Saved Millions by Dumping Its Retirees on Medicare
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- The Pfizer Fire Sale: Positioning for the Future or Suicide Note?
- Yes, There Will Be More Layoffs at Pfizer, as These Numbers Show