Lessons from a Big Pharma downfall

(Fortune) -- Wyeth's recent announcement that chief operating officer Bernard Poussot would be taking over as CEO was abrupt and unceremonious. But the unexpected departure of Bob Essner, who will soon turn 60, signaled the end of an era at the country's fifth-largest pharmaceutical company.

In his roughly six years years on the job, Essner reinvented Wyeth (Charts, Fortune 500) - selling off non-pharmaceutical businesses and changing the company's name from American Home Products - all in the wake of a massive product liability lawsuit. More importantly, Essner invigorated the company's research labs. He also boosted revenue 30 percent, to $20.4 billion.

Wyeth CEO Bob Essner is stepping down after six years at the helm.

Bernard Poussot, a former senior Bristol-Myers executive, takes over as Wyeth's CEO in early 2008.

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So why the sudden exit?

Early reports speculated that Essner fell victim to investor discontent after the FDA failed to approve three Wyeth medicines this year.

But the reasons for Essner's departure, announced last week, are more complicated. Regulatory setbacks are hard to take, but anyone who invests in Big Pharma these days expects rejections and delays. Ever since Merck (Charts, Fortune 500) recalled its Vioxx painkiller medication in 2004, the FDA has been stingy about rubber stamping new drugs. CEOs aren't to blame for that - and investors know it.

This doesn't mean that Essner didn't make mistakes. Indeed, he appears to have landed in the hotseat for a common CEO sin: Excessive hype.

Straightforward, stout and sporting a gray beard, Essner exudes a grandfatherly sense of calm. But, while he is hardly a Steve Jobs-like hypemeister, he's been trumpeting Wyeth's pipeline over the last three or so years, including the three drugs recently held up by the FDA: Pritiq, an antidepressant; the antipsychotic bifeprunox; and Vivant, an osteoporosis treatment.

Wyeth's pipeline appeared plentiful. Essner, with the help of chief scientist Robert Ruffolo, had revamped the company's labs, and Wyeth's scientists were investigating more compounds than many of its peers.

Investors took the bait, driving Wyeth's stock up 55 percent from October 2004 to June, when it hit an all-time high of $58 a share. Investors were hopeful that the upcoming drugs would help Wyeth offset the loss of patent protection for two of its top-selling drugs - the antidepressant known as Effexor XR and Protonix, an antacid medicine.

Both medications, which accounted for more than a quarter of Wyeth's $20.3 billion in 2006 revenues, could face generic competition as soon as 2010.

With Wyeth's recent FDA rejections, investors woke up to the fact that the company's pipeline won't be able to make up for the coming patent losses.

Even if the drugs had been approved, some analysts question whether they would ever have reached the blockbuster status that Essner promised. He had estimated, for instance, that bifeprunox could garner as much as $2 billion at its peak. Some analysts predicted sales of the schizophrenia drug would be roughly a quarter of that.

Says Deutsche Bank analyst Barbara Ryan: "The company was extraordinarily bullish about the pipeline. Our view of those products was poor, even without the regulatory issues, the products were not all that compelling."

To be fair, Wyeth's board insists that Essner's departure in January is part of a planned succession. But many observers believe that plan was hurried along by Essner's perceived overselling of the pipeline.

There were other factors at work too. According to sources familiar with the company, Poussot, a 21-year veteran of Wyeth who takes over as CEO in January, had been courted for the chief executive job at Bristol-Myers (Charts, Fortune 500) after Peter Dolan was ousted in September 2006.

Some observers speculate that, in order to placate Poussot, the company promoted him to chief operating officer in January 2007, and promised that the CEO job would soon be his.

It doesn't hurt that Poussot, a 55-year-old native of France who is now an American citizen, is seen as a somber, rather understated presence. Is there even a French word for "hype"?