Yes, There Will Be More Layoffs at Pfizer, as These Numbers Show

The most frustrating thing about the new round of sales and administrative cuts at Pfizer (PFE) as reported yesterday in the Wall Street Journal was that the word "layoffs" was not used, and the word "jobs" was mentioned only once, in relation to cuts that have already been made.

As such the report obscures rather than illuminates what is likely to happen at Pfizer between now and the end of 2012. CEO Ian Read is struggling to make the pharmaceutical Goliath more efficient, in part by implementing a breakup plan that may spin off its generics and animal drugs businesses. There will be more layoffs at Pfizer.

We know this in part by looking at Pfizer's recent past. The company announced it would lay off nearly 20,000 people in its merger with Wyeth in 2009 in a similar round of "administrative" cuts. History is likely to repeat itself if Read gets another $500 million out of his sales and admin budget this year and another $1 billion in 2012.

The WSJ signals that the same areas that took hits post-Wyeth will take further hits in the next 18 months:

The newest cost-cutting initiative aims to reduce administrative work that is duplicated at Pfizer's headquarters in New York City and in offices around the world, according to people familiar with the matter. Also under review, the people said, are spending for promotion, travel, entertainment and consultants, and sales representatives' spending on printed materials, supplies and electronic gear.

But enough about signalling and reading between the lines. Look at the actual guidance Pfizer has given Wall Street for its revenues, sales and admin expenses. In Q1, Read told the Street he expected Pfizer to meet these numbers:

• 2011 guidance
  Revenues: $65.2 to $67.2 billion (midpoint = $66.2 billion)
  SG&A: $19.2 to $20.2 billion (midpoint = $19.7 billion)
• 2012 guidance Revenues: $62.2 to $64.7 billion (midpoint = $63.45 billion)
  SG&A: $17.5 to $18.5 billion (midpoint = $18 billion

As you can see, the Q1 guidance leaves Pfizer declining in efficiency in 2011.

That kind of chart is not tolerable to Wall Street. That's why Bernstein Research analyst Tim Anderson was complaining about it back in May, when he put it to Read that despite the company's promises to cut its SG&A expenses, it hasn't.

If you take the numbers in the WSJ story -- $500 million more in cuts this year and another $1 billion in 2012 -- and minus them off the Q1 guidance, then you get a chart that looks like this:

Caveat: Excel, annoyingly, has automatically adjusted the scale on the y-axis. That's actually helpful to Pfizer: in addition to the revenue yield line now pointing upward, it does so in a nice smooth trend.

The increase in efficiency between 2010 and 2012 is about 8 percent, giving Pfizer $3.73 in sales for every $1 in sales and admin expenses. That doesn't sound like much, but it would be a huge against-the-trend gain: Pfizer's sales on Lipitor, the $10 billion cholesterol drug, will begin to decline dramatically later this year when it loses its patent protection. So those gains in efficiency that Read thinks he can get will have to come in a world of declining overall sales. He will have to cut faster than Lipitor dies. And that means an 8 percent gain will require real bloodshed -- mostly from the sales and admin staff.

Related:

• Pfizer May Cut Loose Its Generics Unit Despite Doubts It Can Thrive on Its Own
• The Name Game: Why Pfizer's Generic Version of Viagra Will Be Renamed "Avigra"
• How Pfizer's Anti-Powerpoint Jihad Got Its Mojo Back
• Tomorrow Never Comes: Pfizer Says $1.5B in Savings Will Show Up -- Next Year