February 16, 2009
Does Pfizer's merge-and-purge cost the company R&D?
Has the drug industry simply gotten too big for its britches? We wondered when we got word of Pfizer's latest binge and purge, a drill that's doubtless giving alumni of Warner-Lambert, Parke-Davis, Upjohn, Searle and Pharmacia déjà vu.
Pfizer plans to slash 18,000 to 19,000 jobs as part of its $68 billion acquisition of Wyeth for “synergies” of around $4 billion.
It's a punt, aimed at plugging the $12.7 billion hole that the expiration of Lipitor patents will blow in the company's top line in two years—a hole that Pfizer's mighty labs have been unable to fill.
Pfizer is also playing catch-up on biologics and vaccines—areas in which well-diversified Wyeth, with products like Enbrel and Prevnar as well as a profitable consumer products division, is a major player.
It's hard to see how else Pfizer could surmount a patent cliff so steep.
Shareholders grumbled as Pfizer cut dividends, but it buys the world's biggest drugmaker some time—either to innovate or rescale its way out of a hole.
But is it worth it? Not the deal, but the whole boom and bust, high risk-high reward, eat or be eaten Pac Man business model of your modern large pharmas?
Is making unwieldy Pharmzillas even bigger the best way to address what is fundamentally a crisis of scale? Deutsche Bank analyst Barbara Ryan says yes.
“Consolidation provides a viable path to long term earnings persistency,” Ryan wrote in a recent paper. “We have maintained that the upside to multiples for pharma is dependent on improving revenue and earnings visibility during the patent cliff period.”
“In our view,” she continues, “the only viable option towards achieving that goal was via major acquisitions and/or consolidation.”
Ryan notes that pharma is, for all its problems, a “relative port in the economic storm.”
They're not insolvent; they've hoarded huge cash reserves and demand for drugs will remain strong.
Tim Anderson, senior analyst at Seidler Bernstein, recalls Pfizer's 2002 acquisition of Pharmacia and is less sanguine about the merger mania afflicting ever-bigger pharmas.
“At the time, we wondered whether Pfizer might be getting caught in a vicious M&A cycle where, because of its large size, the only way for it to continue growing would be to do serial acquisitions, especially in the context of the company never quite delivering on R&D.”
Indeed, Anderson notes that only a year ago, Pfizer CEO Kindler said at an analyst meeting that the Warner-Lambert and Pharmacia acquisitions “took a long time to integrate” and “were extremely disruptive” on R&D productivity.
Pfizer's in a pickle, Anderson concludes, and the Wyeth buy gives it an out, but in the long term, he wonders if it might not benefit the company more to shrink while focusing on R&D innovation.
“This way, Pfizer could one day emerge on the back end of its contraction as a smaller, more nimble organization able to grow again,” he says. “Buying Wyeth will not allow this to happen.”