Pfizer (PFE) CFO Frank D'Amelio was asked in his Q1 2011 earnings call why so few savings emerged following its merger with Wyeth in 2009. The question had an underlying tension because the person who asked it, Bernstein Research's Tim Anderson, was the same analyst who a year ago ripped former Pfizer CEO Jeff Kindler a new one over a discrepancy in Pfizer's post-Wyeth revenue guidance.
This time -- eyeing a promised but as yet undelivered $1.5 billion in savings -- Anderson asked:
A year and a half into the merger with Wyeth, SG&A [sales, marketing, general and administration costs] isn't exactly going down. ... you're saying SG&A would be about $1.5 billion lower next year. And I'm wondering if you can categorize where that $1.5 billion in cost savings is going to come from exactly?D'Amelio's reply was that a bunch of different things had happened that had kept costs high, so the savings will show up next year, basically:
Now, to run the numbers for the year, our guidance for the year on SG&A is about $19 billion to $20.2 billion is the range and then the 2012 target is $17.5 billion to $18 billion, and then to your point, if you take the midpoints, you're seeing a number that's coming down, give or take about $1.5 billion from '11 to onto '12. The major categories there, and let me frame this, there is no one big ticket item. Let me just start this, it's not like some one big ticket item. It's really multiple areas of opportunity. And one of the things we'll have is we'll have some products that are going to be losing exclusivity. There'll be some marketing and sales and savings as a result of some this products that are losing exclusivity.Pfizer's SG&A costs -- its major quarterly expense -- went up in part due to the acquisition of King Pharmaceuticals and the cost of healthcare reform. So the real question is whether Pfizer's SG&A costs are going down proportionately, and if those costs are Pfizer's real problem. This chart suggests they're not going down (click to enlarge):
Admittedly, this chart is complicated. The pink and blue lines at the top measure how many dollars in revenue Pfizer and Wyeth earned on every $1 they spent on SG&A. As you can see, both companies got about the same amount in revenues from their costs, and after the Wyeth acquisition in 2009 Pfizer has failed to realize any "synergies" in its sales and admin expenses: It still gets about $3.25 for every dollar, just as did before the merger, and just as Wyeth did before it was bought. Pfizer's sales have been flat or at best up only slightly since the merger, so Anderson is right: Pfizer is failing to get efficiencies out of its merger.
The yellow and turquoise lines lower down the chart measure how much "gross profit" Pfizer earns for every dollar spent on SG&A. Gross profit is Pfizer's revenues minus the amount it spent on manufacturing costs, and is the most basic measure of a company's raw health: Is it selling its products for more than it costs to make them? Before the merger, Pfizer's gross profit yield was higher than Wyeth's, even though the companies had the same revenue yield. But after the merger, Pfizer's gross profit yield trended down and currently doesn't look like it's going to reach the heights of Q1 2009, when the company got the most revenues out of its SG&A dollar and spent the least on manufacturing.
This suggests to me that Pfizer is suffering from the increased commodity costs that are bedeviling all other companies: higher prices for fuel, power, raw ingredients and chemicals. There is not much Pfizer can do about that, but it can control its SG&A expenses. It just isn't doing so. The company has had nearly three years to get that pink line to go up (by making its costs go down), so you can speculate on your own as to whether Pfizer will finally achieve its goal with one more year of work.
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