Monday, January 26, 2009

Pfizer and Wyeth – What’s in for Pfizer’s Shareholders?

This week stories began circulating about a potential merger between Pfizer (NYSE : PFE) and Wyeth (NYSE: WFE). Larry’s already written about what it could mean for the pharmaceutical industry if it happens. I’d like to focus on what it means to Pfizer’s shareholders. Personally, I think that it’s nothing more than a defensive ploy on the part of Pfizer. I refer my readers to my January 5th blog of this year for my thinking on large life sciences mergers and acquisitions given the current financial climate.

In this week’s Barron’s, correspondent Jacqueline Doherty writes in the Follow-Up section about the proposed deal and she offers an interesting analysis. I find one point particularly interesting. Acquiring Wyeth would give Pfizer the over-the-counter products Advil and Robitussin. Didn’t Pfizer recently sell off some very valuable consumer products to Johnson & Johnson (NYSE: JNJ)? Sounds like management is a bit confused if you ask me.

Acquiring Wyeth will probably dilute Pfizer’s earnings for some time. How long? I don’t know and I haven’t seen anything published yet. But, it’s a reasonable expectation. Doherty suggests that a combined firm would still have Pfizer’s earnings down by 11% from the prior year. I suspect that we have yet another management buying earnings. Why it should work here when it hasn’t anyplace else, I don’t understand.

Pfizer’s dividend yield is respectable (Barron’s states 7.2%), but, two things about this. First, above normal dividend yields, especially in times like these, normally indicate some sort of market risk. Next, how much longer will this dividend continue? Even General Electric (NYSE: GE) has had to cut its dividend! Depending on how Pfizer finances this deal, the dividend might be at risk. Normally once safe healthcare brands are not as recession-proof as they once were. Johnson & Johnson is learning this to its own chagrin. Of course, there’s the possibility of good things to come from Wyeth’s pipeline. Just how realistic is that though?

Pfizer’s CEO, Jeffrey Kindler, appears to be struggling with what to do. I don’t want to criticize him. He’s in a tough spot like every Big Pharma CEO today. A big acquisition would build momentum and excitement in the press and buy time in the hopes that something, anything, happens outside in the real world. Kind of like what the Federal government and Big Auto are doing, huh?

I’m still not convinced that deals like Pfizer and Wyeth are nothing more than hype being churned by people anxious for a story, any story, to add some pizzazz to what is an otherwise bleak market situation. From a shareholder perspective, this isn’t a god long term play. No, I really don’t think that we’ll see these deals happen. (And, even if announced, completing the financing is another story for another blog.)

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Contributed by Guy de Lastin

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