Health Investment & Finance

BusinessWeek - Catherine Arnst, January 26, 2009.  Pfizer's (PFE) announcement on Jan. 26 that it will buy Wyeth (WYE) for $68 billion in cash and stock called up visions of past Pfizer acquisitions for many pharmaceutical executives—and some of those visions resembled nightmares.

But Pfizer CEO Jeffrey Kindler, who took the top job in 2006, insists the Wyeth deal is different from its earlier mega-mergers with Warner-Lambert in 2000 and Pharmacia in 2003.

Kindler told a news conference that the Wyeth merger is not about "a single product or cost-cutting," as with past deals. Instead, "it's about creating a broad, diversified portfolio." Nevertheless, cost-cutting there will be. Pfizer expects to achieve about $4 billion in "synergies" by 2012, enabling it to reduce the combined workforce of the two companies by 15%, or some 20,000 jobs.

As part of those synergies, Pfizer announced Monday that it will eliminate 8,000 jobs, 10% of its workforce. It is closing five of its 46 manufacturing plants.

The company went through similar rounds of cost-cutting when it acquired Warner-Lambert in a deal worth $90 billion, and when it bought Pharmacia for $60 billion. Those acquisitions sparked criticism in the pharmaceutical industry because of the brutal staff cutbacks and—at least in the case of Pharmacia—because there was no big performance gain.

Pfizer acquired Warner-Lambert mainly for the cholesterol-lowering drug Lipitor, which went on to become the world's best-selling drug. The company targeted Pharmacia primarily to acquire Celebrex, a top-selling pain pill. But Celebrex was in the same drug class as Merck's (MRK) troubled Vioxx, and when that drug was pulled from the market in 2004 for safety reasons, Celebrex sales fell off a cliff. Pfizer's stock has slid more than 50% since the Warner-Lambert deal.

Protecting Morale and Productivity

Earlier mergers were done on former CEO Hank McKinnell's watch. Kindler said the company "has obviously learned a lot from our prior acquisitions" and believes it can do layoffs this time without harming morale and productivity. He emphasized that the combined company will have a strong edge in research and science, although Pfizer announced in early December that it will lay off 800 of its own scientists.

The deal was generally applauded on Wall Street because Pfizer desperately needs a diversified portfolio of new drugs and has been unable to create enough of them on its own. Currently 25% of its revenues come from Lipitor, but the drug is due to lose patent protection in November 2011. In fact, other looming patent expirations mean Pfizer could lose 70% of its 2007 revenues by 2015, and there are no potential blockbusters in its near-term development pipeline to make up the difference.

Wyeth has been struggling with similar problems. Its two biggest drugs, Effexor for depression and Protonix for heartburn, are coming off patent in 2010 and 2011, respectively. Kindler says Pfizer doesn't want Wyeth for those blockbusters but for its strong position in vaccines, biologic drugs, veterinary medicine, and consumer products—areas where Pfizer has little presence (it sold its consumer-products business to Johnson & Johnson (JNJ) for $16.6 billion in 2006).

Kindler also praised Wyeth's promising development portfolio of Alzheimer's disease drugs, any one of which could become a blockbuster upon reaching the market.

Together, the two companies will have 17 different prescription drugs on the market this year that each bring in $1 billion a year or more. No one product, however, will account for more than 10% of the combined company's revenue in 2012, Pfizer said. That distribution softens the damage from individual patent expirations.

Staying No. 1

The combined operation, Kindler said, will produce a company "with a distinct blend of diversification, flexibility, and scale." It will also ensure Pfizer's position as the world's largest pharmaceutical company. Still, says Datamonitor analyst Simon King, the deal "will not resolve the company's negative pharma sales outlook." He estimates that prescription drug sales for the combined company exceeded $70 billion in 2008, and will drop to $54 billion in 2013.

Kindler warned that the merger will also result in flat earnings for the next three years. And, to help finance the deal, Pfizer cut its quarterly dividend by half, to 16˘ a share. The deal is expected to close at the end of the third quarter this year. Pfizer is paying $50.19 a share for Wyeth, a premium of about 30% over the price of Wyeth's stock before news of the merger leaked out on Jan 23. Wyeth's stock closed Friday at 43.74 a share, up 4.91, while Pfizer rose 24˘, to 17.45.

Pfizer will pay for the acquisition with $22.5 billion in cash, $23 billion in stock, and $22.5 billion in debt raised from five banks: Bank of America Merrill Lynch (BAC), Barclays (BCS), Citigroup (C), Goldman Sachs (GS), and JPMorgan Chase (JPM).

The merged company will still be named Pfizer, and Wyeth CEO Bernard Poussot, who took over the company one year ago, said only that he would stay on "through the closing." The boards of both companies have approved the merger, but Wyeth's shareholders must still vote on the deal.

There is already one loser from this merger. Just two weeks ago, Dutch vaccine maker Crucell (CRXL) announced that Wyeth was in preliminary discussions to buy it for $1.4 billion. On Monday it announced the deal has been canceled.

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