Pfizer should buy Wyeth. Here's why.

Barbara Ryan, an analyst at Deutsche Bank who rates Pfizer stock a "buy," says she expects Pfizer to "trade like a treasury bond" until Pfizer takes a big strategic step, like a major acquisition.

Due to a raft of upcoming patent expirations, the future is bleak for Pfizer. Among others, Pfizer will lose the blockbuster Lipitor, as early as 2010. Lipitor generated 2006 revenues of $13.6 billion, which was 28% of Pfizer's $48 billion in revenues. And Lipitor is already being hurt by generics, because Lipitor’s competition is going off patent. In Pfizer’s most recent quarterly report, U.S. sales of Lipitor dropped 25% from a year ago; worldwide, Lipitor sales were down 13%.

So what would you do if you were Pfizer?

There is no magic in business. Pfizer needs another major acquisition to go anywhere and Pfizer’s new CEO Jeff Kindler doesn’t have a choice, if he wants to become as rich as his predecessor Hank McKinnell who walked into the sunset with close to $200 million in his knapsack.

“As we wrote in our March 20 note “Global Pharma M&A,” we believe WYE is one of the two (with BMY) most likely takeout candidates in the US and EU major Pharmaceutical groups. Pfizer in particular would be a fitting takeover partner.” This statement comes from Credit Suisse analyst Catherine Arnold, in an August 20th research report entitled, "What To Do With Wyeth . . ."

She also wrote that “The recent share price decline could increase Wyeth’s acquisition attraction and our SOTP analysis implies a take-out value of $69/share. Our March 2007 M&A report highlighted Wyeth’s strategic and financial prospects as a target for Pfizer, GlaxoSmithKline & Novartis. A Pfizer acquisition is particularly interesting as Wyeth would provide significant access to biologics, yet provide upside to its primary care business including franchises in depression and osteoporosis.”

But there are plenty of people who disagree. One of them is Fortune writer, John Simons who today penned the article, “Why a Pfizer-Wyeth merger is a bad idea.” His basic concept is that “Pfizer's new size was its chief advantage, but also its Achilles Heel.”

And he’s right about that. Bigger means you need bigger drugs to succeed, which makes success more elusive. Getting smaller, however, is not rewarded by Wall Street, and so the only way forward for Pfizer is to get even bigger. And to do this organically is all but impossible.

Fortune also points out that “Wyeth's fortunes aren't much better [than Pfizer’s].”

But if two big pharma companies are going down, they’d go down more slowly if they could devour each other and cut costs in the process.

And the fact is that short-term there is money to be made.

Credit Suisse writes, “Wyeth is undervalued even in our worst case scenario (Protonix brand erosion in 2008) and shares offer more than 20% upside potential in our base case scenario and more than 40% upside potential in a takeout scenario.”

Pfizer has about 150 drugs in development, but Morningstar analyst Brilliant says the pipeline is weaker at the late stage, where Pfizer needs to produce blockbusters to replace Lipitor and other therapies scheduled to lose their patents. "Any drug that is not going to well exceed $1 billion [in annual sales] is not going to move the needle for them," Brilliant said, according to BusinessWeek. Brilliant, too, expects Pfizer to focus on acquisitions.

So stay tuned. Pfizer + Wyeth may very well become true. This is what's happened to the two companies since speculation about a merger started:

- Peter Rost, M.D. is a former VP of Pfizer and the author of Killer Drug and The Whistleblower.

Comments

[MAR]

Peter,

An interesting post, and now big pharma is paying the price for going merger happy around 2000. They paid so much for each other, that they forgot to spend money on early-stage drugs. Now (almost exactly when pre-clinical and Phase I drugs around 2000 would be launching), they realize they screwed up. I think you are totally wrong, however when you say this:

"But if two big pharma companies are going down, they’d go down more slowly if they could devour each other and cut costs in the process.

And the fact is that short-term there is money to be made."

I don't think they're going down....and I think they would be thinking of this merger to completely revitalize the company, not temporarily arrest a downturn (and Wyeth seems to me to have a rosy financial future, despite its recent stock market trouble. the company is being innovative by actively becoming biotech, an unusual pattern, and has other good drugs going forward, like Enbrel). I think you totally underestimate the firm as an economic instrument. However badly run, strategically inept, and perhaps fundamentally evil, Pfizer can still turn it around....someday....maybe...

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