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Pfizer buys Wyeth for $68B
February 2009
by Amy Swinderman  |  Email the author
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NEW YORK—Seeking to maintain its position at the top of pharma but facing looming patent expirations, a sharp drop in revenue and a lackluster pipeline, Pfizer Inc. last month made two strategic moves intended to reinforce an organizational restructuring plan announced late last year: entering into a $68 billion merger deal with rival Wyeth Inc. and laying off 800 of its global R&D workforce.

Both the Wyeth deal—a cash-and-stock transaction valued at $50.19 per share—and the job cuts—about 8 percent of Pfizer's 10,000 global R&D employees—are considered by Pfizer to be the cure for all that ails the struggling pharma as it struggles to produce a successor to the blockbuster cholesterol drug Lipitor and braces itself for generic competition in the next few years. The announcements were made as Pfizer came to grips with abysmal fourth quarter results, with profits plunging 90 percent after the company settled illegal marketing allegations involving the anti-arthritis drug Bextra for $2.3 billion and due to a sharp decline in sales.

Wyeth's own fourth-quarter profits fell 5.6 percent, but most of the attention on this deal has focused on Pfizer, which has seen the writing on the wall for months. In September, the company announced a restructured R&D program to prepare for an expected decline in revenue when its blockbuster cholesterol drug Lipitor faces expected generic competition in 2011. At that time, Pfizer eliminated 1,200 scientists and closed its Ann Arbor, Mich. Laboratory. By year's end, Pfizer had cut 4,700 jobs. Lipitor brought in $12.7 billion in 2007 sales—a fourth of Pfizer's total 2007 revenue of $48.4 billion.

Now, with the Wyeth merger, further job losses are expected as the companies consolidate operations and Pfizer aims to trim $4 billion in costs. Pfizer also said it will close five of its manufacturing plants.

Pfizer Chairman and CEO Jeffrey B. Kindler said in a statement that the Wyeth acquisition is in line with the company's plans to halt early-stage development of medicines for heart failure, high cholesterol and obesity to ramp up its focus on six more profitable therapeutic areas, namely Alzheimer's, cancer, schizophrenia, pain, inflammation and diabetes. Wyeth brings to the table a product portfolio including 12 products with more than $1 billion each in annual revenue aimed at treating cardiovascular, central nervous system and infectious diseases, oncology, and women's health issues. The new company will become "an industry leader in human, animal and consumer health," giving Pfizer a strong presence in biotech drugs and vaccines, and have about a 12 percent market share in the United States, about 10 percent in Europe and about 6 percent in Japan, Kindler said.

"The combination of Pfizer and Wyeth provides a powerful opportunity to transform our industry," Kindler said. "With this combination, Pfizer will offer patients around the world a uniquely broad and diversified portfolio of biopharmaceutical innovations through business units—each one focused on different customer needs and backed by the resources of a premier global organization. By combining the spirit of small, agile enterprises with our combined scale, Pfizer will advance its mission of working together toward a healthier world."

Following the announcement, Pfizer's stock price fell 10 percent in mid-day trading, while Wyeth's was little changed. While some media and analysts speculated that the deal lacked synergy—Fortune Magazine called it "all wrong" for Pfizer—other analysts said it made good sense for Pfizer and may even spark other M&A deals in the health care sector.

"The next big pharma merger is likely to see a level of cost cutting not seen before," wrote Sanford C. Bernstein analyst Tim Anderson in a research note. "This is because the industry is already headed in a sharp cost-cutting direction, even without mega-merger activity, and the pending generic cliff faced by certain companies, like Pfizer, will naturally allow for additional costs to be saved as the products those costs were supporting disappear."

Other analysts focused on what the announcements mean for Pfizer. Mark Mozeson, a partner at Oliver Wyman Group in New York, said reorganization at Pfizer is inevitable if the company wants to remain one of the world's biggest drugmakers.

"Stockholders have to understand that the poor performance of Pfizer's stock over the last few years is a function of the fact that there is only so much time the company has to take dramatic action to turn around the company," Mozeson says. "Wyeth has a decent portfolio, and there is some pretty good overlap with Wyeth's and Pfizer's capabilities.

With Pfizer in the same situation as a lot of other companies—struggling to figure out how they are going to thrive and be competitive in the years ahead and facing the fact that the fundamental economics of pharma are in the process of changing—consolidating with a competitor with diverse resources to offer makes some good sense."

Jim Hall, Mozeson's colleague at Oliver Wyman, said that although Pfizer houses the largest R&D budget—$7.5 billion—of any drug maker by far, the company's streamlined research program means that "the year of the blockbuster is probably over for Pfizer."

"I think Pfizer, as well as the industry as a whole, is coming to grips with a long-term problem in R&D, which is the idea that serendipity plays a large part in their success," Hall says. "There was this idea that if you have a finite budget for R&D, you'll get a return on the investment. I think those days are gone. Clearly, cardiovascular disease is no longer a priority for Pfizer, because that is a program that has to be supported through discovery and life cycle management. Therefore, they have to be more thoughtful about what programs they invest in. The fact that Pfizer is going to manage a diverse portfolio of smaller drugs that are more targeted also means that they should get a much higher rate of success, because it will capture a very large share of the population that needs to be treated."

With similar layoffs announced at most of the other large pharmas, Hall says he would be surprised if Pfizer did not make further staff reductions. But he is confident that the R&D job pool will not become too saturated, he adds.

"The research community is very worried about the bad press because it is a very tight community, but they have to remember, this is the nature of the business," Hall says. "It's also important to remember that these job reductions usually take the form of early retirement or 'do-not-fill- jobs. If you are looking at the actual number of people who will be fired, it is a much smaller set than what has been announced. I think there is enough growth in pharma that those people will be able to find jobs without any issues." DDN
 
Code: E020901

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