Pfizer & Wyeth: Is Mega Merger A Strategic Move Or Desperate Play?

A mega merger combining Pfizer and Wyeth would create a behemoth with combined sales of over $70 billion, build Pfizer's experience base in biotech, give Pfizer the substantial vaccine business it has been searching for and create billions in cost savings opportunities.

But in an era when adapting to faster drug development, agility, and more personalized, targeted medicine appear to be the defining qualities of future success, does a mega-acquisition still make sense? Or is it an aging dinosaur's attempt to postpone evolution?

Rumors that Wyeth could be a potential takeout candidate have been circulating for months - with Pfizer always at the top of the list. Speculation intensified Jan. 23 after The Wall Street Journal put talks surrounding a deal on the front page, estimating a deal valued at over $60 billion.

With Generic Cliff, Few Options For Pfizer

With Pfizer staring over the edge of an enormous patent cliff, the company is under pressure from investors to take drastic steps. In 2011, Lipitor , with its more than $12 billion in sales, is set to go generic.

Other brand losses are also expected in the 2011/2012 timeframe, including Aricept , Geodon and Caduet . Combined, those drugs represented $1.8 billion in sales for Pfizer in 2007. All-in-all Pfizer is on track to lose 70 percent of its 2007 revenues by 2015, according to Credit Suisse analyst Catherine Arnold.

Pfizer CEO Jeff Kindler has not stifled speculation on a large-scale acquisition. Pfizer has been linked to other potential buyout candidates, including Biogen Idec, Amgen and Bristol-Myers Squibb. Sources, however, say the company's board has been divided about whether or not to pursue a mega merger.

Nonetheless, such a deal may well be the only road Pfizer has left to address the patent cliff. The company would need to have had a stellar R&D track record to address losses through its own pipeline, and that has hardly been the case. The failed HDL-raising cholesterol candidate torcetrapib, its highest profile R&D setback, is one example (see ¹ (Also see "Deals Of The Week: GSK/UCB, Myriad/Panacos, Tragara/S*BIO" - Pink Sheet, 26 Jan, 2009.)). Until just two years ago, the company thought torcetrapib would be on the market to help it weather the loss of Lipitor.

Pfizer's current Phase III pipeline shows more new indications for existing drugs like Sutent , Lyrica and Geodon than on breakthrough new molecular entities.

"Pfizer essentially has no realistic way of replacing the many drugs that are scheduled to go generic apart from doing a mega-merger," Sanford Bernstein analyst Tim Anderson said in a Jan. 23 research note. "Is buying Wyeth an ideal solution for Pfizer? No, but we're not sure Pfizer has any other realistic choice."

Wyeth may also provide a way for Pfizer to protect its dividend, answering much speculation about how Pfizer would maintain the dividend in the face of the patent expirations.

Biologics and Vaccines: Two Keys To The Deal

Wyeth would bring to Pfizer a platform in two growing business areas, biologics and vaccines, opportunities Pfizer is keen to expand in. The acquisition would position Pfizer among the top-tier biologics players.

Biotech and vaccine products make up about 36 percent of Wyeth's overall $22.4 billion in revenue. Pharma accounts for 40 percent.

The bigger opportunity from Wyeth is vaccines. The company's Prevnar conjugated pneumococcal vaccine has been a breakout success, generating $2.7 billion in 2007 sales on the strength of an international rollout building on the U.S. base. The company's near-term vaccines pipeline includes Prevnar 13 , a next-generation 13-valent conjugate vaccine that would offer broader protection, and a candidate in the race for a meningococcal group B vaccine (² (Also see "Novartis Meningitis Blockbuster Strategy Key To Firm’s Vaccine Growth" - Pink Sheet, 5 Jun, 2008.)).

The company also markets the rheumatoid arthritis biologic Enbrel outside the U.S. and Canada under a deal with Amgen. Wyeth reported $2.05 billion in sales of Enbrel in 2007. However, the value of Wyeth's biologics franchise is undercut by the fact that full rights to Enbrel will eventually revert back to Amgen. The company's biologics portfolio also includes the renal cell cancer treatment Torisel .

The highest-profile biologics candidate in the pipeline is bapineuzumab for Alzheimer's disease. That product still offers a breakthrough opportunity but has become more of a long-shot after opaque trial results.

Wyeth's small molecule pipeline is less of a draw, especially since the drug maker is facing its own issues with generic competition, including for its top-seller, the antidepressant Effexor XR , which is set to lose exclusivity in 2010. Uptake of Wyeth's follow-on, Pristiq , which launched earlier this year, has been modest (³ (Also see "Niche, Lackluster: Two Words That Sum Up 2008 NME Launches" - Pink Sheet, 12 Jan, 2009.), p. 12) ⁴ The Lost Generation: Weak Progeny from Pfizer and Wyeth R&D".

A Return To Diversification?

Wyeth is also a diversified company, with 24 percent of its revenues coming from consumer health, nutritionals and animal health. Wyeth's consumer health brands include the pain killer Advil , Centrum vitamins, Chapstick lip protection, the allergy medication Alavert and Caltrate for osteoporosis, among others.

Pfizer would have an interesting choice with the consumer business. Diversification is getting more positive attention from the financial community and has helped companies like Johnson & Johnson weather patent expirations and the tougher regulatory environment at FDA.

Ironically, Pfizer sold its consumer business to J&J in 2006 for $16.6 billion, a deal that included U.S. Rx-to-OTC switch rights for the antihistamine Zyrtec and brands like Listerine (⁵ (Also see "J&J Buys Pfizer Consumer Division For $16.6 Bil." - Pink Sheet, 27 Jun, 2006.)).

The success of J&J's Zyrtec OTC launch has led some to question whether Pfizer's sale of the business may have been a mistake. Buying Wyeth and keeping the OTC business would offer Pfizer management a way to correct that perceived mistake without acknowledging the mistake. Selling the OTC business is also attractive and could help pay down the cost of the acquisition.

Cost Savings Are A Big Rationale

In a Jan. 23 research note, Goldman Sachs analyst Jami Rubin said if the acquisition of Wyeth is completed, it should be followed by a breakup of the combined company.

"A possible combination with Wyeth would make sense only if such a move were to be accompanied by a rigorous rationalization of resources and costs, post-merger (such as spins, selling low growth businesses)," she said.

The large cost-cutting opportunities may be specially tempting to Pfizer. Since taking over the helm at Pfizer in 2006, CEO Jeff Kindler has been focused on cost cuts, eliminating 13,500 jobs over the past two years. The company recently signaled it plans to lay off up to 800 scientists (⁶ (Also see "Pfizer By The Numbers: 800 R&D Job Cuts But At Least Two Dozen Phase III Projects By Year End" - Pink Sheet, 13 Jan, 2009.)). The company also plans to lay off a third of its sales force of roughly 8,000 reps in the first quarter.

Against that background, the 47,500 Wyeth employees appear as a tempting way to improve Pfizer's financial health.

Bernstein's Tim Anderson expects an aggressive cost cutting approach. "A potential tie-up between Pfizer and Wyeth would likely break the mold in terms of the cost cutting that would occur," Anderson said. He predicted Pfizer could cut 70 percent from Wyeth's SG&A and R&D within two years. Total revenues of the combined company would be lower in 2015 ($61 billion) than in 2010 ($73 billion), he predicted, but through cost cutting, earnings-per-share would remain flat.

How Much Above $60 Billion?

With Wyeth's market cap at about $52 billion, based on a $38.83 closing price Jan. 22, the $60 billion acquisition price that has been floated represents a premium of only about 15 percent.

News of the talks will help to fix the market view of an acceptable price.

Arnold suggests a premium of 25 percent or more is likely, which would substantially increase the risk to Pfizer and could raise more questions about financing the deal. Pfizer has plenty of cash on hand ($34.4 billion as of Sept. 28). However, it is expected that debt would also be required to fund the transaction. Pfizer's strong cash flow and balance sheet have given the firm an A1 credit rating by Moodys. However, the investment services firm has given Pfizer a negative credit outlook based on concerns about the Lipitor patent expiry and high potential for M&A risk.

- Jessica Merrill ([email protected])