Since its creation in 1989, Bristol-Myers Squibb has brought to market about the same number of new drugs as Pfizer—26 vs. Pfizer’s 25 (Figure 1). Their cumulative R&D spending, however, diverges widely. BMS did it for $56 billion, while Pfizer has spent $122 billion. Much of the difference—$62 billion out of $66 billion (94%)—was incurred during Pfizer’s post-1999 mega-merger era.
BMS’ results clearly show that one could bring 26 drugs to market for less than $60 billion over that 25-year period. Pfizer’s much greater spending was the result of its acquisition-fueled, runaway R&D spending. Its $62 billion excess spending over BMS can thus serve as an estimate of the shareholders’ value destroyed by these acquisitions. With 6.2 billion shares of common stock outstanding, this translates into a loss of about $10 per share—or 31% of Pfizer’s share price ($32.42) as of December 28, 2015.
It has been estimated that Pfizer’s proposed tax inversion might save the company about $2 billion a year. By comparison, its mega-blockbuster strategy has cost it an average of $3.9 billion annually in excess R&D costs since 2000. The Allergan merger—Pfizer’s biggest—would likely extend that situation and make it worse.
Over the last three years, Pfizer’s R&D spending has exceeded BMS’ by an average of $3.3 billion a year. What is the logic of incurring excess R&D spending of $3.3 billion a year in order to claim a $2 billion tax benefit? Quite simply: none. Pfizer’s single-minded focus on a narrow financial measure—its tax rate—is ill-conceived and damaging to its investors’ interests. Does Mr. Read wish to be remembered as the man who fixed his company’s tax rate and precipitated its decline, or as the leader who put an end to the misguided strategy that has already cost its shareholders so dearly?
