The Ethical Dilemmas of Pfizer’s New Organizational Restructuring


pfizer bulding front

In the past two years, Pfizer has adopted the notion that smaller is better. The company, along with many other pharmaceutical companies, has been facing increasing challenges to develop new “blockbuster” drugs. Although pharmaceutical companies have always been accustomed to somewhat low R&D success rates (approximately 4%), they are currently trying to cope with the ever-rising costs of developing new drugs.[1] Unlike before, today’s pharmaceutical companies do not have the monetary flexibility they once possessed to pay for the R&D of multiple drugs. Initially, Pfizer resorted to acquisitions and licensing to strengthen its new product pipeline.1 This strategy worked well up until Pfizer’s main “blockbuster” drugs (Celebrex, Detrol, Lipitor, and Lyrica) all faced patent expirations before the year 2015. Because of several major upcoming patent expirations, the company has been forced to re-assess and alter its business strategy. Although the company is working to better position itself among pharmaceutical industry competitors, Pfizer’s new strategy of streamlining its organizational structure affects various shareholders and stakeholders. Because of this, the concept of consequentialism is critical in evaluating the morality of Pfizer’s decision.

Pfizer’s Recent History:

handshakeOn November 30, 2012, the implementation of Pfizer’s new business strategy began. Pfizer officially announced that it had successfully completed the sale of its infant nutrition business to Nestle for $11.85 billion.[2] According to CFO Frank D’Amelio, the selling of Pfizer’s Nutrition business worked to maximize the value of its core businesses by providing the company’s R&D program with an additional $1.85 billion cash.2 The sale also enhanced shareholder value by allowing Pfizer to utilize the remaining $10 billion for its share repurchase program.2 By reacquiring the company’s shares as treasury stock, Pfizer increased its earnings-per-share (EPS) and promoted stock price growth (See Appendix A).

After a short amount of time, Pfizer made another similar business decision in an attempt to better focus on the company’s core businesses, and

Zoetis at IPO

Zoetis at IPO

enhance shareholder value; however, instead of formally auctioning off an entire business unit, the company decided to raise capital by offering it’s Animal Healthcare unit, Zoetis, in an IPO. On January 31, 2013, 20% stake in Zoetis was sold during its IPO.[3] The company offered 81.6 million Zoetis Class A shares and held onto the remaining 414 million Class B shares, allowing Pfizer to maintain 80.2% control of Zoetis.[4] Zoetis’ IPO brought in $2.2 billion, making it the largest IPO for a U.S. company since Facebook went public.[5] After experiencing such success with Zoetis’ IPO, on May 22, Pfizer decided to completely spinoff Zoetis by offering an exchange of stock.6 In an attempt to reclaim its own outstanding shares, Pfizer offered to exchange up to 400,985,000 shares of Zoetis common stock for outstanding shares of Pfizer common stock.[6] For every $100 of Pfizer common stock exchanged, investors received $107.52 of Zoetis common stock. This tactic allowed Pfizer to further reclaim its own outstanding shares; therefore, internally increasing the price of its shares.6

Pfizer’s most recent effort to better streamline its operations comes in the form of a new, internal organizational restructuring. On July 29, 2013, Pfizer announced its plans to internally separate its commercial operations into three business segments (two Innovative business lines, and one Value business line).[7] The first Innovative business segment solely focuses on products holding market exclusivity beyond 2015.7 The second Innovative business segment consists of Vaccines, Oncology, and Consumer Healthcare.7 Lastly, the Value business segment focuses on products that generate strong, consistent cash flow, and those that are expected to lose market exclusivity by 2015.7 To reiterate the purpose of this organizational restructuring, CEO Ian Read declared, “This represents the next steps in Pfizer’s journey to further revitalize our innovative core, enhance the value of our consumer and off-patent established brands and maximize the use of our capital to create value for Pfizer and our shareholders.”[8]

How Consequentialism Fits into the Bigger Picture:

Pharma Industry SpendingAs you have now learned, Pfizer’s loss of numerous “blockbuster” patents poses a great threat to the company’s vitality. Although the 1990’s and early 2000’s provided the company with significant profits, the current state of the pharmaceutical industry disables the company from running in the same manner it had previously operated. With various shareholder and stakeholder interests intertwined with the company’s well being, Pfizer’s executives were dealt with the difficulty of deciding a new path for the company to follow. A path that would, undoubtedly, possess various benefits and consequences.

The idea of plain consequentialism is simple. It states that whenever someone is faced with a decision, the morally right decision is the one with the best overall consequences.[9] From this understanding of plain consequentialism, one can dive further into understanding the various other categories of consequentialism. In looking over the recent history of Pfizer’s business decisions, I believe that dual consequentialism best describes the ethical implications of the company’s streamlining.

Dual consequentialism is the belief that the word “right,” when speaking about a person’s actions, is ambiguous.10 This ambiguity leads to the idea that a person’s “right” actions or decisions possess both moral and objective characteristics.10 For instance, an objectively right action is the action with the best consequences; whereas, the morally right action is any action with the best reasonably expected consequences.10 The Internet Encyclopedia of Philosophy provides readers with a great example of dual consequentialism. Imagine you are a doctor who must properly diagnose an ill patient. After performing a thorough and detailed diagnosis of the illness, you provide your patient with a pill that any responsible doctor would choose for the symptoms displayed; however, the pill turns out to harm the patient because of an unexpected reaction to the medicine. In getting back to the idea of dual consequentialism, one can say that that the prescription was objectively “wrong,” but it was also morally “right.”[10]

In Pfizer’s case, one can state that dual consequentialism is present in deciding how the company should proceed to operate. On the one hand, streamlining the company’s core businesses demonstrates an objectively right decision in the sense that Pfizer can now better focus on R&D’s goals and enhance shareholder value. The sales of its Nutrition business and Zoetis, and its massive share repurchasing program were actions that specifically provided the company and its shareholders with the best possible consequences. On the other hand, in making the decision to streamline its business, Pfizer forwent its moral obligation to provide its other stakeholders with the best reasonably expected consequences. While the concept of dual consequentialism can be used to show that a morally right consequence often trumps an objectively right consequence, this does not prove to be true in terms of Pfizer’s streamlining effort.

Ethical Implications of Pfizer’s Downsizing Decision:

Pfizer may be right in believing that its decision to downsize was objectively “right;” however, this cannot be said about the decision’s moral righteousness. As a result of Pfizer’s streamlining, many employees have either been let go or forced into retirement. In Pfizer’s July 3, 2011 quarterly disclosure, the company issued a statement regarding the company’s “cost-reduction” and “transformation” initiative:

“From the beginning of our cost-reduction and transformation initiatives in 2005 through July 3, 2011, Employee termination costs represent the expected reduction of the workforce by approximately 55,400 employees, mainly in manufacturing and sales and research, of which approximately 39,100 employees have been terminated as of July 3, 2011.”[11]

To put this downsizing effort into perspective, Pfizer’s termination of 55,400 employees has cost the company approximately $1.9 billion.[12]In regards to employee retirement benefits, Pfizer has cut a majority of its health retirement benefits by utilizing a loophole associated with a 1993 decision to cap retiree benefits at a certain number (See Appendix B).12 Instead of adding yearly cost-of-inflation increases to the cap, the company left the policy untouched.12 By doing so, retirees are now responsible for paying half of their Medicare bill while Pfizer is saving $534 million per year that it had previously promised to spend on former employees.[13]

An Unexpected Aftershock:

Although Pfizer’s executives may not have seen their decision to streamline the company as unethical, a majority of the company’s employees (stakeholders) do. There are a variety of online pharmaceutical blogs that allow people working in the pharmaceutical industry to express their opinions about company decisions and working conditions. One blog, called “Cafepharma,” allows employees to anonymously rant and rave about various problems associated with the companies they work for. In response to Pfizer’s downsizing efforts, a majority of users have expressed anger towards the company by writing posts such as, “Tis the season! Gotta increase shareholder value [through layoffs and forced retirement]!”[14] On the other hand, a few users have responded with neutral comments such as, “When you are a stand alone public company, you need to do whatever to make the street happy. And that means cutting jobs.”12

It seems that Pfizer’s goal of downsizing to better focus on its core businesses is not going according to plan. Instead of enabling workers to perform their jobs in a highly efficient manner, Pfizer has caused internal commotion amongst its remaining employees. With employee morale waning as more layoffs occur, Pfizer may have a difficult time achieving the organizational performance goals it had initially intended to accomplish.

Conclusion:

Pfizer’s decision to streamline its company by selling two business units and spinning off the rest has turned into an ethical dilemma that the company had not initially planned for. By focusing primarily on the objective “righteousness” of its organizational restructuring, the company ignored its moral obligations to its stakeholders. Pfizer did a poor job providing both its shareholders and stakeholders with the best possible expected outcome of its streamlining process. The company did not innocently forget to recognize that layoffs are part of downsizing. Instead, it experienced tunnel vision and refused to acknowledge the harm that “enhancing shareholder value” inflicted upon the company’s employees.

Pfizer is not the only company that has committed ethically unsound acts; however, it is rather unsettling to know that a pharmaceutical company with the goal of helping millions of people in need of healthcare would act so shortsightedly towards its own employees. While I am truly excited and fortunate to begin my working career at Pfizer Consumer Healthcare this year, I am also nervous about my future job security. If history continues to repeat itself and Pfizer continues to spinoff its business units in order to further invest into R&D, what will the world’s largest pharmaceutical company become? Will it learn from its previous acts of shortsightedness and be able to revitalize itself? Or will it further fall victim to greed’s material attractiveness?

Appendix A

Screen shot 2014-04-17 at 10.41.02 PMSource: Yahoo Finance (PFE)

Appendix B

Pfizer RetireeSource: CBS News-Pfizer Plans 16,300 Layoffs Amid Health Benefit Cuts for Retirees

 

Works Cited

Singh, Rajender, and Sumit K. Chaudhuri. “Pfizer: Dearth of New Products and Future Challenges.” IBS Case Development Centre (2005): 1. Print.

 

“Pfizer Completes Sale of Nutrition Business to Nestlé.” Pfizer Pharmaceutical News and Media. Pfizer, Inc., 30 Nov. 2012. Web. 16 Apr. 2014. <http://press.pfizer.com/press-release/pfizer-completes-sale-nutrition-business-nestle&gt;.

 

Katje, Chris. “Pfizer Will Reward Shareholders With Zoetis Spin-Off.”Seeking Alpha: Read. Decide. Digest. Seeking Alpha, 25 May 2013. Web. 16 Apr. 2014. <http://seekingalpha.com/article/1461211-pfizer-will-reward-shareholders-with-zoetis-spin-off&gt;.

 

“Pfizer/Zoetis Exchange Offer.” SEC.gov. U.S. Securities and Exchange Commission, 31 Jan. 2013. Web. 16 Apr. 2014. <http%3A%2F%2Fwww.sec.gov%2FArchives%2Fedgar%2Fdata%2F1555280%2F000119312513261488%2Fd533019d424b3.htm%23rom533019_14>.

 

Johnson, Linda A. “Pfizer Plans Offering to Pare Zoetis Stake.”HuffingtonPost.com. The Huffington Post, 22 May 2013. Web. 16 Apr. 2014. <http://www.huffingtonpost.com/huff-wires/20130522/us-pfizer-zoetis-stake/&gt;.

 

“Pfizer To Create Separate, Internal, Global Innovative And Value Businesses.” Pfizer.com. Pfizer, Inc., 29 July 2013. Web. 16 Apr. 2014. <http://www.pfizer.com/news/press-release/press-release-detail/pfizer_to_create_separate_internal_global_innovative_and_value_businesses&gt;.

 

Haines, William. “Consequentialism.” Internet Encyclopedia of Philosophy. IEP, 24 Mar. 2006. Web. 16 Apr. 2014. <http://www.iep.utm.edu/conseque/&gt;.

 

“Pfizer, Inc. July 3, 2011 10-Q.” SEC.gov. U.S. Securities and Exchange Commission, 3 July 2011. Web. 16 Apr. 2014. <http%3A%2F%2Fwww.sec.gov%2FArchives%2Fedgar%2Fdata%2F78003%2F000115752311004964%2Fa6825454.htm%23pfizerpt1item1notes>.

 

Edwards, Jim. “Pfizer Plans 16,300 Layoffs Amid Health Benefit Cuts for Retirees.” CBSNews.com. CBS Interactive, 15 Aug. 2011. Web. 16 Apr. 2014. <http://www.cbsnews.com/news/pfizer-plans-16300-layoffs-amid-health-benefit-cuts-for-retirees/&gt;.

 

Anonymous. “Pfizer Layoffs.” CafePharma.com. Jelsoft Enterprises Ltd., Nov. 2013. Web. 16 Apr. 2014. <http://www.cafepharma.com/boards/archive/index.php/t-543799.html&gt;.

 

[1] Singh, Rajender, and Sumit K. Chaudhuri. “Pfizer: Dearth of New Products and Future Challenges.” IBS Case Development Centre (2005): 1. Print.

[2] “Pfizer Completes Sale of Nutrition Business to Nestlé.” Pfizer Pharmaceutical News and Media. Pfizer, Inc., 30 Nov. 2012. Web. 16 Apr. 2014. <http://press.pfizer.com/press-release/pfizer-completes-sale-nutrition-business-nestle&gt;.

[3] Katje, Chris. “Pfizer Will Reward Shareholders With Zoetis Spin-Off.”Seeking Alpha: Read. Decide. Digest. Seeking Alpha, 25 May 2013. Web. 16 Apr. 2014. <http://seekingalpha.com/article/1461211-pfizer-will-reward-shareholders-with-zoetis-spin-off&gt;.

[4]”Pfizer/Zoetis Exchange Offer.” SEC.gov. U.S. Securities and Exchange Commission, 31 Jan. 2013. Web. 16 Apr. 2014. <http%3A%2F%2Fwww.sec.gov%2FArchives%2Fedgar%2Fdata%2F1555280%2F000119312513261488%2Fd533019d424b3.htm%23rom533019_14>.

[5] Johnson, Linda A. “Pfizer Plans Offering to Pare Zoetis Stake.”HuffingtonPost.com. The Huffington Post, 22 May 2013. Web. 16 Apr. 2014. <http://www.huffingtonpost.com/huff-wires/20130522/us-pfizer-zoetis-stake/&gt;.

[6]“Pfizer/Zoetis Exchange Offer.” SEC.gov. U.S. Securities and Exchange Commission, 31 Jan. 2013. Web. 16 Apr. 2014. <http%3A%2F%2Fwww.sec.gov%2FArchives%2Fedgar%2Fdata%2F1555280%2F000119312513261488%2Fd533019d424b3.htm%23rom533019_14>.

[7] “Pfizer To Create Separate, Internal, Global Innovative And Value Businesses.” Pfizer.com. Pfizer, Inc., 29 July 2013. Web. 16 Apr. 2014. <http://www.pfizer.com/news/press-release/press-release-detail/pfizer_to_create_separate_internal_global_innovative_and_value_businesses&gt;.

[8] “Pfizer To Create Separate, Internal, Global Innovative And Value Businesses.” Pfizer.com. Pfizer, Inc., 29 July 2013. Web. 16 Apr. 2014. <http://www.pfizer.com/news/press-release/press-release-detail/pfizer_to_create_separate_internal_global_innovative_and_value_businesses&gt;.

[9] Haines, William. “Consequentialism.” Internet Encyclopedia of Philosophy. IEP, 24 Mar. 2006. Web. 16 Apr. 2014. <http://www.iep.utm.edu/conseque/&gt;.

[10] Haines, William. “Consequentialism.” Internet Encyclopedia of Philosophy. IEP, 24 Mar. 2006. Web. 16 Apr. 2014. <http://www.iep.utm.edu/conseque/&gt;.

[11]”Pfizer, Inc. July 3, 2011 10-Q.” SEC.gov. U.S. Securities and Exchange Commission, 3 July 2011. Web. 16 Apr. 2014. <http%3A%2F%2Fwww.sec.gov%2FArchives%2Fedgar%2Fdata%2F78003%2F000115752311004964%2Fa6825454.htm%23pfizerpt1item1notes>.

[12] Edwards, Jim. “Pfizer Plans 16,300 Layoffs Amid Health Benefit Cuts for Retirees.” CBSNews.com. CBS Interactive, 15 Aug. 2011. Web. 16 Apr. 2014. <http://www.cbsnews.com/news/pfizer-plans-16300-layoffs-amid-health-benefit-cuts-for-retirees/&gt;.

[13] Edwards, Jim. “Pfizer Plans 16,300 Layoffs Amid Health Benefit Cuts for Retirees.” CBSNews.com. CBS Interactive, 15 Aug. 2011. Web. 16 Apr. 2014. <http://www.cbsnews.com/news/pfizer-plans-16300-layoffs-amid-health-benefit-cuts-for-retirees/&gt;.

[14] Anonymous. “Pfizer Layoffs.” CafePharma.com. Jelsoft Enterprises Ltd., Nov. 2013. Web. 16 Apr. 2014. <http://www.cafepharma.com/boards/archive/index.php/t-543799.html&gt;.

 

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One thought on “The Ethical Dilemmas of Pfizer’s New Organizational Restructuring

  1. Good use of dual consequentialism.

    Seems to me the best expected outcome from restructuring, especially the Zoetis capital raised, is to use it to address the R&D problem. The social contract with Pfizer and any public corporation is that they provide what society needs. Hence, if they used the capital raised and the stock swap simply to raise EPS by reducing number of outstanding shares, well, that does NOTHING to address drug development.

    Moreover, the employee cuts were on top off of whoever left with the Zoetis spin-off, right?

    So, they cut costs, dumped a lot of brain power, and raised capital. What does Pfizer have to show for these choices? What are they doing with these changes?

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