Pfizer's Wyeth Buy Eclipses $2.3B Bextra Troubles; 19,000 Layoffs to Come

Today's announcement that Pfizer is to acquire Wyeth for $68 billion eclipsed some things that on any other day would have been headline news in themselves: a) The fact that Pfizer's earnings were down 90 percent due to a $2.3 billion settlement with the Department of Justice over its off-label promotion of Bextra, the Cox-2 painkiller. And b), that the new company plans 19,000 layoffs to make its deal work. Pfizer described the write-down this way:

Fourth-quarter 2008 results were impacted by a $2.3 billion pre-tax and after-tax charge resulting from an agreement in principle with the Office of Michael Sullivan, the United States Attorney for the District of Massachusetts, to resolve previously disclosed investigations regarding allegations of past off-label promotional practices concerning Bextra, as well as other open investigations.

... [there was also an] after-tax charge of $640 million resulting from the agreements in principle to resolve certain litigation involving the Company's non-steroidal anti-inflammatory (NSAID) pain medicines in third-quarter 2008

It's also roughly half of what Merck paid to settle its Vioxx Cox-2 cases. As you'll see in the coverage, this news is almost completely eclipsed by the deal. Here's an example from Bloomberg, where it made only the 15th paragraph of the story.

That's not the only questionable event lurking behind the $68 billion dollar topline. We also learn that Pfizer is to halve its dividend payments to 16 cents a share to help pay for the acquisition. Unsurprisingly, PFE shares dropped this morning. Wyeth holders may be getting a payday, but Pfizer holders are taking a bath.

BNET readers are already familiar with reasons why this deal may end up making things worse, not better, for Pfizer and Wyeth. Pfizer CEO Jeff Kindler admitted today in a press conference that past Pfizer acquisitions, such as Warner Lambert, had not gone well.

Kindler: Those acquisitions definitely hurt morale and hurt productivity, no doubt about it.

Pfizer also will halve its quarterly dividend to 16 cents a share, fire 15 percent of the combined company's workforce, or 19,000 people, and close five factories.

Turning a $70 billion behemoth composed of two giant, different, corporate cultures into a single, nimble, unified force will be a "challenge," as they say in management-land. It is almost as if Kindler has decided that he can't be bothered with the difficult work of turning Pfizer around on its own. Instead, he's just said, "Screw it, I'm going to buy my way out of this."

Pfizer's patent cliff and loss of Lipitor are well known. But Wyeth has similar problems: It will lose Effexor in 2010 and Protonix in 2011. So now the new company has twice the number of massive craters to fill, and its revenues will be so massive that small drugs earning $300-$500 million a year in revenues just won't be good enough. In that sense, the new company's options have actually narrowed and become more desperate.

In part, Pfizer's hopes are pinned on the acquisition of Wyeth's pact with Elan for Alzheimer's drug bapineuzumab. It could be huge. But there's high risk there. There's a couple of other bombs waiting to go off. Wyeth has a $21.1 billion litigation reserve for lawsuits triggered by diet drugs Redux and Pondimin. And although it has won most Premarin/Prempro breast cancer cases, it still faces about 10,000 suits.

And what of Enbrel, the jewel in Wyeth's crown? A reporter from The Pink Sheet asked about that in today's press conference. Wyeth CEO Bernard Poussot confirmed that rights to the drug revert to partner Amgen in 2012 for U.S. territories.

Here's something Fortune wrote about a speculative Pfizer-Wyeth deal 18 months ago:

The Pfizer/Wyeth merger scenario is far-fetched, particularly because Pfizer would inherit another troubled pipeline and more big-sellers whose patents expire in the same concentrated period of 2010 and 2011. "Would the idea behind the merger be that misery loves company?" queries Standard & Poor's pharma analyst, Herman Saftlas. "Most mergers in this sector haven't panned out from an earnings growth perspective. But even worse, these two companies are in the same boat."

Pfizer could have an investor revolt on its hands if it does decide to propose a Wyeth acquisition.

• See BNET's previous coverage of Pfizer's M&A activity:
• The Pfizer-Wyeth Deal Worst-Case Scenario
• The Pfizer-Shire Deal Worst-Case Scenario
• The Pfizer-Amgen Deal Worst-Case Scenario
• The Pfizer-Allergan Deal Worst-Case Scenario
• The Lilly-ImClone Deal Worst-Case Scenario
• The Worst-Case Scenario in the Roche-Genentech Bid
• Why a Pfizer Takeover of Bristol-Myers Squibb Seems Unlikely
• Odds May Be Against a Pfizer-Bayer Deal