Pfizer in Talks to Buy Wyeth for $60 billion

By Marie Daghlian, The Burrill Report

With Pfizer’s business dependent on sales of drugs facing near-term patent expiration, speculation has swirled as to what the drug giant might do in the near future. As recently as January 11, a Goldman Sachs analysts wrote “the imperative for radical change is higher than ever, and we believe that pressure is mounting on management to do something big and soon.” Now the cat is out of the bag. The Wall Street Journal reported that Pfizer is in talks to acquire rival drug maker Wyeth in a deal that could be worth $60 billion, citing “people familiar with the matter.” Spokespeople for both companies say that they would not comment on market speculation.

The rival drug makers have been in discussions for several months. A combined company will change the global pharmaceutical landscape, creating a global powerhouse with revenues of about $75 billion and a host of blockbuster drugs including Pfizer’s cholesterol drug Lipitor and Wyeth’s pediatric vaccine Prevnar, and rheumatoid arthritis drug Enbrel which it markets with Amgen.

Several analysts see the merger as a good fit for Pfizer as it could allow the company to diversify into vaccines and injectable biologic medicines. Lipitor, which accounts for about a quarter of Pfizer’s revenue, is set to go off patent in 2011 when revenue from the drug is expected to drop sharply. Investors have been speculating for quite sometime about how Pfizer would address this revenue cliff.

A November Deutsche Bank industry report predicted large-scale consolidation in the pharmaceutical industry and argued that Pfizer needed “a break up, spin, and (better yet) merger that leads to massive restructuring as a first step to an eventual breakup.” Deutsche analyst Barbara Ryan considers a Pfizer-Wyeth combination synergistic and a good way to realize major cost savings by streamlining areas of overlap.

“It sort of takes out the cliff and it balances their revenues with a portfolio of products that have a different profit life cycle” than traditional pills, Ryan told Reuters. “I think it’s eminently doable. The question is whether others enter the fray. It’s going to come down to price. The deal is attractive at this price; it’s not attractive at any price.”

R&D productivity has been one of pharma’s biggest problems as the advent of new blockbusters to replace ones with expiring patents has gotten fewer. Some drugmakers have addressed their pipeline problems by looking to partner with biotech companies or separating big R&D operations into smaller, and hopefully, nimbler and more productive units.

Until now pharma has been loathe to slash unproductive R&D budgets fearing a backlash from investors. According to the Deutsche Bank analysis, “If one management team stood up and announced that it plans to cut its budgets by 25 to 30 percent, it would be severely punished by shareholders, as its worst fears would be validated. Those cuts will have to come, but they may be veiled as “synergies.”

But Pfizer has had a troubled merger history and has a reputation for paying too much for acquisitions. But this time it may be different. Deutsche Bank analysts pointed out that the current talks value Wyeth at a 15 percent, compared to a 25 to 35 percent premium in past big pharmaceutical deals.

Most analysts also believe that Pfizer took a step in the wrong direction when it sold its consumer products division to Johnson and Johnson in 2006 to focus on its prescription drugs division. Now that Pfizer faces patent expirations on most of its successful drugs between 2001 and 2015, it should be looking for a way to pump up its pipeline and diversify its business model to include vaccines, biotechnology and consumer products. Wyeth has all of these. Wyeth shares rose $4.91 to $43.74 on the prospect of a deal while Pfizer closed up 24 cents $17.45.

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