On the Cyberroad

I think that I’ve finally managed to break away from Pharmaceutical Research and Manufacturers of America (PhRMA) (http://www.phrma.org/ ) and its world view. Now, I’m continuing my journey across the Internet looking for Big Pharma’s story.

This week I wanted to move away from Big Pharma’s lobbyists and other front organizations. I went to the websites of two large pharmaceutical companies, Merck and Pfizer. These are two major players in the industry and seemed like a good place to start.

I’ll start with Merck (http://www.merck.com/ ). The usual trappings of a Fortune 500 company were there along with what I’m coming to expect at a large pharmaceutical company. Looking at the site, one could get the impression that this is an altruistic organization worried about patients, the environment, and helping small businesses. (Alright, I admit it, I’m a little bit cynical.)

But, I found what I came looking for, Merck’s pipeline (http://www.merck.com/research/pipeline/home.html?WT.svl=content ). I have to admit from a purely technical perspective, this was done very nicely. Now, let’s talk about the content.

Phase II, Phase III, and Under Review drugs are listed in addition to research areas. Three categories of drugs can be highlighted, biologics, small molecule, and vaccines. Clinical trial results can be linked to for drugs in Phase III and Under Review.

I’m the last guy who can say what’s a good drug or a bad drug from a financial perspective. And, Merck’s site doesn’t include financial forecasts for these potential drugs probably for very good SEC and FDA reasons. Although, I’m probably not going too far out on a limb here by saying that internally Merck is forecasting the financial potential of these drugs.

But, except for a mention to now looking at biologics, there’s nothing about what their philosophy is or why they are doing what they do. Yes, they talk about doing good things and saving lives and that’s about it. I just don’t see an exciting story that tells me that these guys are going to be tomorrow’s breakout story.

Let’s take a quick look at Pfizer’s site (http://www.pfizer.com/home/ ). Here we have all the state of the art social media, Facebook, Twitter, YouTube, and LinkedIn. When I went looking for their pipeline I found a twenty-two page PDF document (http://media.pfizer.com/files/research/pipeline/2010_0127/pipeline_2010_0127.pdf ). (They really could learn something from Merck.)

Like at Merck’s site, I couldn’t find any reference to where Pfizer saw it’s future heading. From both sites I came away with a picture in my mind of countless lab techs all over the world mindlessly droning away at testing compounds for some vague end. I’m reminded of players at a roulette wheel in a casino. Play enough numbers long enough and sooner or later, you’ll win. Didn’t this get Wall Street in trouble a while back?

My journey so far hasn’t shown me any insights yet into why Big Pharma will turn around. If they have any, they should bring them to the fore better than they’ve done so far. Come back next week to see what I’ve found.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Pharmaceuticals - How Much Excess Capacity Is Too Much?

Scanning news headlines earlier this week, I came across an article about Pfizer (PFE) laying off another 6,000 employees as part of its post-Wyeth acquisition cost cutting program. (See Melly Alazraki’s blog at http://www.dailyfinance.com/story/company-news/pfizer-plans-manufacturing-job-cuts/19481620/ .) Being a curious sort of guy, I went onto Google and searched for references to Pfizer layoffs. I found many other links to layoffs all over the world. Durham, NC; NYC; Plattsburgh, NY; Collegeville, PA; Ireland; and Puerto Rico were just a few of the locations that I found where layoffs were taking place.

Pfizer originally announced layoffs approximating 20,000 jobs from its Wyeth acquisition. (http://blogs.wsj.com/health/2009/10/15/pfizer-wyeth-deal-wraps-up-layoffs-to-follow/ ) This week’s announcement in addition to the layoffs announced eight plant closures and reduced operations in six others. (http://www.thestreet.com/story/10759832/1/pfizer-wyeth-combo-leads-to-more-layoffs.html?puc=tscmarketwatch&cm_ven=tscmarketwatch ) Obviously, a lot of extra capacity is being wrung out of the industry. Which could make one wonder what sort of career opportunities might exist in pharmaceuticals in the future?

Clifford S. Mintz, otherwise known as the BioJobBlogger (http://www.biojobblog.com/promo/about/ ) has written a very interesting and relevant blog (http://www.biojobblog.com/2009/11/articles/biojobbuzz/pfizerwyeth-layoff-update/ ) about what’s been happening in the pharmaceuticals industry. He maintains that the traditional vertically integrated industry model is coming to an end with new drug development coming from outside Big Pharma with only marketing and distribution functions remaining.

The points made are good ones. Previous blogs here have echoed similar feelings. What I can’t stop thinking about is where does this all lead? Recent history has taught us that the twin phenomena of the twenty-first century, globalization and the Internet, are driving out middlemen. I remember my old Economics 101 professor teaching that perfect markets require perfect knowledge resulting in zero profits. (Professor, apologies, it’s been more years than I care to remember. All errors in restating your lectures are my fault.) Aren’t the pharmaceutical companies transforming themselves into middlemen?

In my simplistic view of the world, there will be manufacturers and sellers. In order to survive middlemen will have to become large enough to take advantage of economies of scale. There probably won’t be a need for many players in this space. In fact, economic reality may dictate that will only be a small number of global players. (Oligopoly, anyone?)

Consolidation and closure of manufacturing plants with the consequential elimination of jobs is a sure sign of excess capacity in an industry. And, once those plants and jobs are gone, they won’t be coming back any time soon, particularly in the United States. Here’s why. Given local zoning and environmental ordinances in many American communities, building and running a modern manufacturing plant is an expensive and time consuming proposition.

I’ll continue to follow this theme going forward. I suspect that we’ll see more signs of an industry undergoing consolidation.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Big Pharma – Will It Get Any Better?

I’m still on this kick that life sciences and Big Pharma, in particular, are stuck and aren’t getting better anytime soon. I’ve been out trolling the Net looking for any hints of anything that might indicate either I’m wrong or there’s a turnaround coming soon. And, guess where this is going, I’m not finding much. In fact, I’m not finding anything. (I’m not counting spin doctoring materials churned out by Big Pharma. If you read those you’d run out and load up on their stocks.)

What I am finding tends to support what this blog has been saying for a while, Big Pharma’s not going anywhere anytime soon but down. I’d like to call out a blog which I recently came across whose author, Pharmboy a member at Phil’s Stock World, has recently posted a blog entitled “The Calm Before the Storm – Big Pharma Is Gonna Have Big Problems and Pfizer is the Biggest” (http://seekingalpha.com/instablog/6284-philip-davis/60352-the-calm-before-the-storm-big-pharma-is-gonna-have-big-problems-and-pfizer-is-the-biggest ) that gives a detailed analysis of the trends affecting the industry.

Pharmboy (that’s a great name for a blogger isn’t it?) predicts that Big Pharma revenues will stop growing by 2014. He notes as this blog has that growth will have to come from acquisitions and explains how picking the right science will be essential for making the right investments. This is an important point, because some of the larger pharmaceutical companies are run by what I call professional managers, MBA types with a good handle on numbers, marketing, branding, and the like but who really don’t have a clue about the basic sciences let alone the complex, advanced theories that are behind modern drugs. The recent financial meltdown on Wall Street shows what happens when senior management loses touch with their products.

The blog also lists the major drugs coming off patent in the next several years and estimates that these represented $49.9 billion in 2009 revenues. One point where Pharmboy differs from this blog is that he believes some of the pharmaceutical companies, Novartis (NVS) and Merck (MRK) actually have good drug pipelines while Abbott’s (ABT) is weak but could be augmented by acquisitions.

Pfizer (PFE) is singled out for criticism for paying too much for Wyeth (WYE) and not keeping an eye on the science. He also writes about the inefficiencies and lack of innovation in a larger organization like Pfizer.

I’ve called out Pharmboy’s blog because it’s a very good summary of the issues facing Big Pharma today. What I want to know is when will the main stream media begin to take a closer look here as well? Finally, how about the financial community? When will they begin to challenge the valuations of Big Pharma?

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Big Pharma – First Cracks Appearing?

Larry and I have been blogging for a while about the health (no pun intended) of Big Pharma. Earlier, we had even drawn comparisons to Big Auto. We’d left the theme for a while – there’s never a shortage of stories about this industry. But, a couple of weeks ago, I came across an interesting article in Barron’s and I felt that I was no longer a lonely voice crying in the desert. There may actually be fellow travelers!

In the June 1, 2009 issue of Barron’s, Vito J. Racanelli in his column, The Trader, questioned the supposedly solid financial results of the pharmaceutical industry. He cited analytical work done at First Global by Kavita Thomas which reported that the superior return on equity (ROE) recently at large pharmaceutical companies was not a result of improved operating results but of also of charges to equity and stock buybacks. The types of charges noted arose from foreign exchange losses and pensions. Vito cited examples of Pfizer (PFE), Eli Lilly (ELI), Johnson & Johnson (JNJ) and Merck (MRK) where these activities took place.

Vito cites Kavita’s work as a potential leading indicator for the health of the pharmaceutical industry. He’s right. While I’ve been blogging about product pipelines and government intervention, Kavita has supplied the financial analysis that can be used to see where the industry is going. Interestingly, Vito comments on pharmaceuticals’ debt levels implying that they are not excessive although debt ratios are rising, again, because of falling equity numbers.

Both Thomas and Racanelli ask how long will the pharmaceuticals use creative financing and expense reductions to support their earnings. As we’ve seen in other industries as of late, it won’t last.

So, what next? I expect that we’ll probably see more creative accounting and attempts to reduce costs. But, it’s a zero sum game. Many of the pharmaceutical companies are sitting on large cash reserves and probably have access to other sources of funding. There won’t be a dramatic deterioration overnight in the financial situation of Big Pharma overnight. Possibly, some of the vendors supplying outsourcing and similar services may have a temporary surge until the money lasts and all cost cutting avenues have been exhausted.

One final word, watch those cash reserves at Big Pharma. Ford (F) is still alive, barely, but alive, because it had the foresight to arrange for lines of credit before they needed them. General Motors (GM) and Chrysler didn’t and had to go cap in hand to Washington looking for money. If the Obama administration succeeds in reducing drug costs in this country then Big Pharma may be having to follow the same path. Hopefully, they’ll leave their corporate jets at home.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Big Pharma’s Wanna-be’s

I’ve been blogging for awhile about the life sciences industry and things have started to get lively. Between the economy and its impact on the financial markets and the recent spate of mergers, Larry and I haven’t been lacking for blogging topics.

While following the industry and researching for my blogs, I’ve been noticing that the industry’s excess capacity is slowly merging itself away. A recent article in Barron’s described Bristol-Myers Squibb (NYSE: BMY) as a mid-sized pharmaceutical company. This got me thinking, who’s in Big Pharma now? Don’t worry, this blog won’t become a tedious list of company names designed to fill space. (BTW, I personally use CNBC’s Pharma Watch List at http://www.cnbc.com/id/15837675 for those of you who really enjoy lists of company names.) Pfizer (NYSE: PFE) and Wyeth (NYSE: WYE) are merging. So too, are Merck (NYSE: MRK) and Schering-Plough (NYSE: SGP), unless Johnson & Johnson (NYSE: JNJ) have something to say about it. Roche (SWX Europe: ROG) and Genentech (NYSE: DNA) are finally getting together. Jim Cramer of CNBC was speculating about Abbott Laboratories (NYSE: ABT) and
Celera (NYSE: CRA) getting together awhile back. (I wonder if I really need to say “Jim Cramer of CNBC”. Is there anybody on the planet who doesn’t know Jim especially after Jon Stewart got finished with him the other night? But, I digress.) Hey, wait a second, this is starting to turn into one of those tedious lists I was griping about several sentences ago.

Let’s pull out two of those names, Johnson & Johnson and Abbott Laboratories and talk about them for a few minutes. They get tossed in everybody’s list of Big Pharma companies but are they really pharmaceutical companies? Yes, they do research and development, market drugs, and go cap in hand to the FDA like the Merck’s, Pfizer’s, and Lilly’s. But, what about all those other things that they do?

First, both companies have significant businesses in the medical devices sector. Definitely healthcare related. Complicated products with healthy (no pun intended) gross margins, I’ll bet. But, don’t they have similarities to drugs? Insurance companies and Medicare pay for them. Hospitals and similar healthcare providers don’t want a lot of vendors’ similar products with just different enough procedures cluttering their storage rooms and confusing their staffs. Product risk? Remember heart defribulators? I’ll bet Boston Scientific does. That one made Vioxx look a sandlot stickball game.

Next, Johnson & Johnson has a consumer products business, mostly high end goods or their own highly respected brand name products. But, many businesses are finding that highly respected brands are not as recession proof as they once were. Then, there’s what I call the Wal-mart effect. Consumer products companies have been resigning themselves to having to deal with the likes of Wal-mart and the few other remaining retail distributors in this country. Also, consumer products have competitors, names like Proctor & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL) which don’t normally appear in blogs like ours.

Finally, let’s talk about management. Johnson & Johnson has Bill Weldon and Abbott has Miles White. How do they manage the complexity and challenges of such disparate businesses? How are their successors developed and chosen? Anyone of the three business lines described require long careers to master and are different enough to be fairly brutal with newcomers who dabble. Anyone who doubts this should check with Bob Nardelli, formerly of Home Depot, who now works for $1 a year at Chrysler. (I can even get a better rate than that.)

Some argue that buying shares in companies like Johnson & Johnson and Abbott Laboratories is liking buying shares in a mutual fund. I don’t buy it. Mutual funds have administration fees and not the corporate overheads that these companies have. Investors thinking of investing in the life sciences sector should be looking at either specific stocks or actual mutual funds.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Big Pharma’s Dividends – How Safe Are They?

Recently, several large companies, Pfizer (NYSE: PFE), General Electric (NYSE: GE), and PNC (NYSE: PNC) have cut their dividends. This got me wondering, what might happen to Big Pharma’s dividends? After all, their share prices have been slammed like everyone else’s lately. (Although, admittedly, not all to the same degree.) I’ve always been suspicious that Big Pharma are not early adopters but followers. And, why not here? All that cash going out to greedy shareholders could be kept in the coffers, and, what do you do with all that cash? Why, either buy somebody else’s company or buy back your own stock. I didn’t say that this would be logical.

The Dow Jones was down about 52% from its 2007 high before its recent comeback. Buying stocks now could produce double the dividend yield from just two years ago. I’ll bet many recent purchasers of Pfizer and General Electric felt that way. But what about companies like Merck (NYSE: MRK), Bristol-Myers Squibb (NYSE: BMY), or Johnson & Johnson (NYSE: JNJ)? Decent returns now, but what about tomorrow?

What impact will Merck’s announced takeover of Schering-Plough (NYSE: SGP) have on its future dividends? I haven’t read of any changes yet but this may only be a matter of time. The media are speculating about Johnson & Johnson making a counteroffer for Schering to preserve its interests with Remicade. What might that do to Johnson & Johnson’s longstanding, unbroken record of annual dividend increases? Or, for that matter, might they have to go back a few years?

Interestingly, after Standard & Poor’s March 12th downgrade of General Electric’s credit rating from AAA to AA+, of the five remaining U.S. companies retaining their coveted AAA rating, two are Big Pharma, Pfizer and Johnson & Johnson. And, Pfizer is on Standard & Poor’s watch list because of its forthcoming acquisition of Wyeth (NYSE: WYE). I’m always amused at the herd mentality exhibited by Big Pharma.

First, everybody went after blockbuster drugs followed by direct to consumer marketing (DTC). Acquisitions came along next, and, now dividend decreases may be the next fad. Lowered credit ratings are just the unintended consequences of doing this.

OK, where does this all lead, you may be asking. (If you own Big Pharma stocks, you’d better be.) Remember several themes that Larry and I have been hammering away at for awhile.

Drug pipelines are drying up. President Obama will do “something” to U.S. healthcare. (Maybe only something easy like authorizing Medicare to negotiate volume discounts on prescription medications.) Unemployment is rising and many of the newly unemployed are foregoing their COBRA plans and other medical expenses until they find new jobs. All of this means that revenues could soon begin to disappear. Cash flow contracts and, well, you get the idea.

For now, everyone’s dividends seem safe. But, so did Big Auto’s and General Electric’s shareholders.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Abbott Labs – Back to the Future

When I blogged recently about Abbott Laboratories (NYSE: ABT), I hadn’t expected to come back for a while. But, as I’m learning in the Blogosphere, things change.

Abbott is increasing its quarterly dividend 11%, its thirty-seventh annual increase (www.smartmoney.com/news/on/?story=ON-20090220-000734-1120 ). This was an opportunity to return and blog some more. Miles D. White, Abbott’s CEO, was upholding Guy’s Eighth Rule of Being a CEO, when in trouble, talk about the dividend, better yet, increase it.

The old saw about those who do not remember the lessons of history being doomed to repeat will really come into play here. What we’re seeing here is another of the large pharmaceuticals (does Abbott really even qualify as Big Pharma?) trying to keep up the pretense that it’s business as usual. Unfortunately, I’m only reminded of those recently unemployed who struggle to maintain their standard of living in order to convince their families and neighbors that everything is alright. One has to ask are they only really kidding themselves.

Monies that will be needed in the future are being dispensed today to keep the shareholders complacent. I still don’t see any reasons why Abbott Labs, along with several other pharmaceutical companies, won’t be traipsing up to the Hill in Washington in a few years looking for a bailout. Finding someone to blame other than themselves could be hard, especially by then. Big Auto blamed the banks. The banks blamed their borrowers. Giving that the drug industry will looking to the government for help, I suspect that they won’t be blaming Washington. But, hey, dumber things have happened.

I keep harping on companies like Abbott and Pfizer and issues like acquisitions (i.e., Wyeth), pursuit of the next “blockbuster” drug, and dividend increases because these are all busted strategies. Other industries like Big Auto and financial services have tried some or all of these and have come to naught. Why should things be any different this time?

A friend of mine (contrary to what Larry says, I do have some) once said that the definition of insanity was doing the same thing over and over expecting a different result. Get the picture. I know that I’m using up my quota of clichés in this blog but isn’t that what they’re for, right?

We’re looking at an industry that’s on the cusp of changes that will be seismic in nature. There will be winners and losers. So far, I’ve been focusing on the behaviors that will signify the losers. Shortly, I’ll begin to blog about the characteristics of the winners. This is an industry in transition and we won’t be lacking things to blog about.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

Pfizer-Wyeth Redux--We Can't Help It!

I’m back on the Pfizer-Wyeth again. I can’t help myself. I feel as if l’m in that dream we’ve all had of being in a slow motion crash again and again. Here’s why.

Let’s start with the overall economy. Since last autumn, we have CEO’s either being excoriated in the press or by Congress. Obviously, there have been some serious shortfalls in abilities here. Now, let me ask a question, just because Big Pharma hasn’t been dragged up to the Hill yet by Congress doesn’t mean that they won’t be. (Doesn’t mean that they will be either, but old Guy’s sticking his neck out again.) Honestly, there’s some good potential here. Have we seen anything yet from Big Pharma’s CEO’s to distinguish them from their colleagues in banking or automobiles? This is where I’d really like to get some reader feedback.

Next, let’s talk about sticking the collective heads in the sand and hoping that problems will go away. Let’s face it. Barack Obama has won the election. He took the oath of office (twice) and he’s now the President of the United States (POTUS for you acronym freaks out there). Despite some Republican protests, President Obama’s stimulus package has been passed and signed. So, anyone who doesn’t think healthcare reform isn’t coming soon to a hospital near you had better wake up and smell the coffee. Especially, if they’re in the drug or medical device businesses.

Another one of my favorite gripes about the healthcare industry, and most other industries as well, is it’s fascination with mergers and acquisitions. Don’t get me wrong in the right circumstances, with the right reasons and for the right price, these types of deals can make a lot of sense. But, please notice the qualifiers that I listed. There generally aren’t too many deals that meet those criteria and then, if there happens to be a bidding war then any value goes right out of the window. How many M&A deals over the last thirty years, in any industry, have lived up to their oft overhyped potential?

Finally, let’s get down to basics. Business is all about making things and then selling them. Good products and services with good customer service attract customers who pay their bills and come back to buy more. While you’re at it, hire good employees, treat them right, and improve your productivity as a consequence. But, Big Pharma seems to be ignoring this model. Many of them are moving to a portfolio model of buying new drugs, outsourcing everything that they can, and making their profits on the resulting margins. Not bad business if you can get it, but how many companies can be in that kind of a business. Possibly a few, but, certainly not as many as are in the pharmaceutical industry today.

Oh, and let me add that with few exceptions they are optimizing the "blockbuster" model that no longer works. And, has anyone explained the law of large numbers to these people--combining two multi -10's of billion dollars business into one, taking on "synergy targets" has been at best short on results albeit high on promises.

So, let’s see what happens this year. If I’m wrong, I think I’ll find out soon enough.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

The Pfizer-Wyeth Merger - We Were Wrong – They are WRONGER

OK, I was wrong, but there is no mea culpa needed. The Pfizer (NYSE: PFE) and Wyeth (NYSE: WFE) deal has been announced and somehow financing was arranged. The hubbub in the media seems to support my opinion that this a bad deal for Pfizer’s shareholders, especially if you’re one of the 19,000+ employees who will likely lose their job in this deal. (Wanna bet that after President Obama gets through bashing banks for paying out $18 billion in TARP funds for bonuses, he’ll be setting his sights on Big Pharma.) Although, Jeff Kindler may still be trying to put a positive spin on things. Jeff better be good at spin meistering with a 50% reduction in Pfizer’s dividend-anyone notice that after an initial run up, both PFE and WYE retreated rather significantly based on some on Wall Street who don't view this merger as a layup after all.

Mike Huckman’s been busy doing the post-game review on this deal. Check out his blog (http://www.cnbc.com/id/15837675 ), in particular, his January 27th and 28th blogs. He offers some interesting perspectives and also links to a Wall Street Journal analysis of the deal. Other than the companies themselves and their hired flacks, I haven’t come across any serious commentators who think that this is a good deal.

I’m going to keep sticking my neck out on this one though. The virulent press reaction and Kindler’s ability to keep the financing together for this deal are my two main reasons.

First, the press reaction. Pfizer is simply buying revenue (at a very high price we add) to offset its looming loss of Lipitor to the generics. Kindler’s been trying to keep his job and has been shuffling assets around in a corporate finance version of three card monte. More people are going to be looking at this deal and start questioning it. I don’t expect anyone to be riding to the rescue with a counteroffer. Anybody remember Boston Scientific (NYSE: BSX) and Guidant? Let’s see, how many billions in overvalued assets did Boston write off the other day? Many pundits (and we agree) think that Pfizer would have been far better off buying several biotechnology companies (e.g., Biogen-Idec, Gilead, Genzyme or as we have advocated Amgen all would have helped) and why justify re-entering the Consumer business when two years ago, Kindler and company claimed they were selling the Pfizer Consumer business to J&J (NYSE: JNJ) so they could "focus' on Pharmaceuticals.

Next, let’s talk about that bank financing. I haven’t come across any details about which financial institutions or investors are behind the $22.5 billion in external financing or its terms. In these times of credit crisis, I’m sure that they are very interesting. By the way, another $47.5 billion will come from internal financing. One commentator noted that Pfizer would probably have to repatriate offshore cash to help with the deal. I suspect that this could mean paying US corporate taxes. Again, not a great deal for shareholders. Given the lack of value that deal produces along with the job losses noted above, I wonder if banks might start rethinking their loan arrangements. Sooner or later, Washington, DC is going to start asking what’s happening with all the money being forked over to the financial services sector. Executive bonuses and job losses don’t seem like a good return for taxpayers’ money. Somebody’s going to start paying attention here.

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

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.)

As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin