A Pfizer-Wyeth Merger Isn't the Cure-All

Pfizer (PFE) has been hinting for months that it was in the market for a major acquisition to bolster its sagging fortunes, and it may have found its target. The Wall Street Journal (NWS) reported on Jan. 23 that New York-based Pfizer, the world's largest drugmaker, is in talks to buy Wyeth (WYE), the ninth largest, for as much as $60 billion in stock and cash. Neither company will comment on the report, but that hasn't stopped analysts, investors, and industry bloggers from mulling over the potential of a combined "Pfyeth."

The general reaction: Acquiring Wyeth might boost Pfizer's fortunes in the short term, but it won't solve the long-term problems that are roiling the major pharmaceutical makers. As many observers have noted, Pfizer and the rest of the drug industry suffer from a lack of promising new products to replace older ones going off patent. What is less widely understood is that Pfizer also will face an increasingly constrained marketing environment, even if it succeeds in bulking up with Wyeth.

The fact is, it's getting a lot harder to market the products both companies have right now. Congress is widely expected to restrict direct-to-consumer advertising by drug companies this year, and much stricter limits were put in place last year on how the industry markets to doctors. Universities and hospitals also are toughening up existing constraints on how much money their researchers can accept from companies for promotional activities.

"The industry needs to dramatically refocus its promotional activities, which means really tightening up and shrinking what they have now," says Jim Hall, partner in the health-care practice of the management consultancy Oliver Wyman. "I think one of the drivers of this merger is the opportunity to reduce the sales force." Pfizer currently has one of the largest sales forces in the industry, some 7,000 strong. Hall notes that Wyeth's antibiotics and specialty drugs don't require a lot of marketing to consumers, as statins do, and Pfizer may regard that as a big plus.

The Coming Lipitor Void

Wyeth, based in Madison, N.J., also has a strong presence in biologic drugs and vaccines, segments of the market where Pfizer has few products. But those drugs will not compensate for Pfizer's loss of revenues when the patent expires on its cholesterol-lowering pill Lipitor, the world's best-selling drug, in 2011. Last year Lipitor generated $12.5 billion in sales, about 25% of Pfizer's total revenues. Due to other patent expirations, Pfizer is facing a loss of more than 70% of its 2007 revenues by 2015, and there are no equivalent blockbusters in its development pipeline.

Wyeth's future doesn't appear to be much brighter. Its two biggest drugs, Effexor for depression and Protonix for heartburn, are scheduled to lose patent protection in 2010 and 2011, respectively. "In 2010 the combined Pfizer-Wyeth could have $73 billion in worldwide sales. That number may decline to $68 billion in 2012 due to patent losses," Zacks Investment Research analyst Jason Napodano wrote in an investors' note titled "Pfizer Eyes Wyeth. We Ask Why?"

Wyeth had a big setback last year when one of its more promising pipeline candidates, an Alzheimer's vaccine it is developing with Elan (ELN), turned in disappointing clinical trial results. And, to top it off, the FDA rejected two of its trumpeted new drug candidates in 2008.

Shoring Up the Top Line

Despite long-term patent and marketing challenges that no single merger can address, most industry observers believe Pfizer has little choice but to do some kind of major acquisition, given the imminent loss of income on Lipitor. Certainly, the company has the wherewithal to do a deal. At the end of 2008, Pfizer was sitting on about $25 billion in cash, along with a AAA credit rating. "Pfizer is in the most desperate state of anyone in the industry in terms of patent expirations," says Standard & Poor's analyst Herman Saftlas. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Cos. (MHP).) "We feel that it is in the best interests of Pfizer to do a deal like this in order to shore up the top line."

Pfizer also needs to reassure investors that it can get back on track. The company froze its dividend at the end of December, after 41 annual increases, and in early January it announced it would lay off 600 researchers, 8% of its scientists. Pfizer's stock price has slid more than 50% since its last major acquisition in 2003, when it purchased Pharmacia, also for $60 billion. Pfizer closed the week at 17.45, up 24¢, while Wyeth rose 13%, 4.91, to close at 43.74.

Consolidation Spark?

Pfizer has a history of big mergers, having acquired Warner-Lambert in 2000, three years before the Pharmacia deal. But the Pharmacia acquisition turned out to be a disappointment because its biggest drug, the Cox-2 inhibitor Celebrex, was severely damaged by the fallout over Merck's (MRK) similar drug, Vioxx, which was pulled from the market due to safety concerns. Some analysts say Pfizer may have better luck with Wyeth because of the company's strong presence in biotech drugs, an area where Pfizer has had little success.

At any rate, the merger, if it goes through, could mark the start of a wave of consolidation in the beleaguered pharmaceutical industry, according to Credit Suisse (CS) analyst Catherine Arnold. In a note to investors, she suggests that Bristol-Myers Squibb (BMY) could be the next acquisition candidate.

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