Friday, January 23, 2009

Pfizer-Wyeth-Are We Kidding? If Not, Who and What is Next??

A Pfizer Wyeth Merger—Are We Kidding? If not, Who's Next??

This morning, January 23rd, The Wall Street Journal “speculates” that there have been talks between Pfizer and Wyeth about a combined company, although they quickly point out that there is nothing imminent. My colleague Guy de Lastin recently wrote in this blog that there isn't a rational business reason for big pharmaceutical company mergers this year and has been notably supported in The Journal with "The record of big mergers and acquisitions in big pharma has just not been good. There's just been an enormous amount of shareholder wealth destroyed," said Gary Pisano, a Harvard Business School professor who has written about the issue.

Admittedly there are contravening forces at play here-Pfizer among others has been notably non-productive in its R&D sector spending over $7.5 billion a year with little tangible payoff—in fact they announced 800+ layoffs for this particular group in the last week or so. On the other hand, Wyeth has had a bit more success with a newly re-engineered R&D organization—having said that, both companies have major blockbusters, Lipitor and Enbrel come from acquisitions, not in house development. Clearly there are enormous “synergy targets” should two such massive businesses merge. Combine these factors with an investment community that is pushing for consolidation, and a lower market cap this year than last mixed together with a cash position of over $25 billion for Pfizer and a market capitalization of just over $50 billion for Wyeth—maybe, just maybe this could happen.

If Pfizer-Wyeth becomes a reality, we enter a new realm of what we call “Super-Mega-Global” Pharmaceutical giants. This may force other merely mega-globals into a merger frenzy. Europe's big 3, Glaxo, Novartis and Sanofi may view the world in a different way and look in their backyards at the likes of AstraZeneca, Bayer and even Roche as feeding fodder. How about the likes of Merck, J&J, Abbott or BristolMyers looking over the landscape at each other or such potentially delectable morsels as Amgen, ScheringPlough or others or each other or some large generics, or...... You get the point, in an industry known for follow-the-leader mentality, the investment bankers, lawyers and our friends the consultants are in for some major paydays.

Contributed by Larry Rothman


The Consultant's Consultant said...

Apparently there is some difference of opinion from our point of view--please look at:

As an example, here are some of the points being elucidated:

In any case, Wyeth's fortunes don't depend as heavily on any one drug as Pfizer's do on Lipitor. Pfizer's massive "patent cliff" includes the expected loss of more than 70 percent of its 2007 revenue by 2015, noted Arnold, whose firm has done investment banking or other business with the two drugmakers.

Wyeth is now one of the world's top biotech drugmakers and most of its revenue now comes from those drugs, vaccines and veterinary medicines, not chemically synthesized pills.

Wyeth's stable of consumer products - including household names such as Chap Stick, Centrum vitamins, pain reliever Anacin and Preparation H - is nearly as valuable as the iconic brands Pfizer sold to Johnson & Johnson three years ago when it chose to get out of consumer health and focus on pharmaceuticals.

What do you think??

The Consultant's Consultant said...
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The Consultant's Consultant said...

The New York Times published the following article on the potential merger--interestingly, many of our initial thoughts are reflected here:

Pfizer Said to Be Closing In on Deal for Wyeth

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Published: January 23, 2009

This article was reported by Duff Wilson, Natasha Singer and Andrew Ross Sorkin and written by Mr. Sorkin.
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Pfizer employees near one of the company’s research facilities in Groton, Conn.
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Is the long-awaited drug industry consolidation under way?

That was the question Friday as word spread that Pfizer was near a deal to buy Wyeth for more than $60 billion in cash and stock. With teams of bankers and lawyers racing to complete that deal over the weekend, the blockbuster transaction could be announced within days, according to people involved in the talks.

A combination of Pfizer and Wyeth, which has been long envisioned throughout the industry, would make Pfizer, already the world’s biggest drug company, even larger. Pfizer had revenue of more than $48 billion in 2007, and Wyeth’s sales exceeded $22 billion. Their combination would put pressure on rival companies to seek their own mergers.

“The dance needs to get started,” said Catherine J. Arnold, an analyst for Credit Suisse. “I think this action would do that,” she said. “There’s overcapacity in the pharmaceutical sector at large.”

Under the terms of the deal being negotiated, Pfizer would pay about $50 a share for Wyeth, these people said. Pfizer would pay about two-thirds of the price tag in cash and one-third in stock. Pfizer would finance the deal, in part, through its own cash reserves — some of which are abroad and need to be repatriated, probably incurring tax penalties — and the rest through loans from banks.

People involved in the deal cautioned that the talks could still collapse, in part because there are so many moving parts: the buyer, the seller and at least five banks that all need to agree on financing conditions in a very difficult credit market. The boards of both companies have scheduled special meetings for Sunday to vote on the deal in anticipation of continued negotiations through the weekend.

Other companies that have long been seen as take-over candidates include the conventional drug giants Bristol-Myers and Schering-Plough and the biotechnology players Amgen and Biogen Idec.

The negotiations between Pfizer and Wyeth appear to be driven by cost savings as much as by sales and research opportunities. Pfizer is heading toward a big patent cliff with the expiration of its rights to Lipitor, the best-selling drug in the world, in November 2011. Sales of the drug, $12.7 billion in 2007, account for a quarter of the company’s total revenue. And by 2015, patent expirations will mean Pfizer will have lost 70 percent of the revenue it would have had in 2007.

As patents expire, generic drug makers can swoop in with low-priced versions. Indeed, the growing market share of generic drugs is one of the big problems for many makers of brand-name pharmaceuticals.

Wyeth has a big vaccine and biologics business that is not facing the same level of patent pressures, because it is much more complicated and cost-prohibitive to make generic versions of such drugs. So a merger would add diversity and bring stability to Pfizer’s drug sales.

Still, because much of Pfizer and Wyeth’s portfolios overlap, there is potential to save billions of dollars through cutting duplicative costs, analysts say.

“If Pfizer and Wyeth combine sales forces and other operations, they will have a sleeker cost structure,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. “Most other large companies have cut just everything they can. The only way to come up with new cuts without endangering their future is to merge in a way that creates redundancies that give the companies new job-cutting opportunities.”

Two weeks ago Pfizer said it would lay off 800 researchers, and it hinted at further job cuts. Last year, it did away with more than 10,000 jobs and announced it would focus on six therapeutic areas — cancer, pain, inflammation, diabetes, Alzheimer’s disease and schizophrenia.

It remains an open question whether mergers in the pharmaceutical industry work at all. Pfizer is itself a product of a series of mergers, with mixed results. It bought Warner-Lambert, which owned Lipitor, for more than $90 billion in stock in 2000 and three years later bought Pharmacia for stock valued at $60 billion.

"Pfizer’s tried it before, and it really hasn’t worked with other firms," said Edward F. X. Hughes, a professor who teaches pharmaceutical business at the Kellogg School of Management at Northwestern University.

The deal may also demonstrate that pharmaceutical companies feel the need to be more diversified beyond prescription drugs. A Pfizer-Wyeth tie-up would be one way for Pfizer to get back into the consumer health business. Wyeth owns brands like Advil and Centrum vitamins. In 2006, Pfizer sold its consumer business — which included such household names as Sudafed, Listerine, Nicorette and Lubriderm — to Johnson & Johnson, which because of that acquisition has managed to weather the financial storm better than its rivals.

For Pfizer, which is led by Jeffrey B. Kindler, 52, a lawyer who previously worked for McDonald’s, the transaction would also bolster the company’s presence in biologic drugs, which are made from living cells, instead of the chemicals on which conventional pharmaceuticals are based. Wyeth’s Prevnar, a childhood vaccine against pneumonia and meningitis, is made from living cells and is generally considered more immune to competition from generics. Wyeth also makes Enbrel, one of the world’s biggest biologics with about $3 billion in global sales for the first nine months of 2008. Enbrel is a drug that treats adult rheumatoid arthritis and plaque psoriasis.

“To be able to take over Wyeth’s well-regarded biotech stuff is pretty good,” Mr. Gordon said.

Investors applauded the possibility of a deal. Shares of Wyeth closed up 12.6 percent to $43.74 after The Wall Street Journal reported news of the talks on Friday. Pfizer rose 1.4 percent to close at $17.45, a rare show of confidence by investors for a potential buyer during a merger.