What Does Barron's See in Abbott that We Don't?

We’re well into the second month of the year, the world hasn’t fallen apart as some had predicted. But, then things haven’t taken off as others had hoped. Things are kind of, please excuse the technical term, blah.

Yet, some people are still back in the good old days, or, wish that they were. I found an example in this week’s Barron’s. Neil A. Martin penned an article about Abbott Laboratories (NYSE: ABT) entitled “Abbott Labs: a Prescription for Success”. He paints a very optimistic picture for Abbott. Yet, somehow, I couldn’t help but think that I’ve heard this all before.

Much is made of Abbott’s drug pipeline and how, unlike its competitors, they aren’t about to have any patents expire soon on their key products such as Humira, Niaspin, and Similac. OK, but, don’t patents eventually expire? (OK, I know some of you are snickering out there in the Blogosphere and saying to yourselves, “Not if you’ve got good lawyers.” I don’t buy that and will deal with you in a future blog.) They do. In some parts of the world, like India, they don’t care about your patents and if you try to introduce your products there, you’re going to run into the buzzsaw called ‘generics’.

Much is made of Xience, Abbott’s drug eluting stent acquired from the late Guidant Corporation. Between stents, drug eluting or otherwise, becoming a commodity and the risks from government healthcare reform, I’m not so sure that I’d get too excited about this.

Now, I don’t want to appear to be too critical. Neil does mention Wall Street’s concerns about Abbott’s growth being unsustainable. Though, he does try to minimize their arguments.

CEO Miles D. White is quoted as saying that Abbott if done with acquisitions for a while thereby violating Guy’s Third Rule of Being a CEO, always talk about the possibility of acquisitions. I suspect that White realizes that he can’t do acquisitions anymore for a variety of reasons ranging from financial to organizational.

Here’s why I’m harping on this article and poor Martin. Things have changed in the life sciences sector significantly over the last few years and will continue to do so. Pipelines come to an end. Companies without strong intellectual capital and lengthy track records of scientific achievement, not necessarily resulting in new products, cannot achieve these overnight. Companies with these assets are led by PhD’s in the sciences, MD’s, and similar credentials not MBA’s from Stanford University accomplished in the legerdemain of corporate finance.

The recent lessons from Wall Street and the American banking industry should be sufficient proof that there’s more to running to running a successful business than just a mindless shell game of assets shuffling.

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