Last Updated Dec 17, 2008 12:07 PM EST
On Pfizer's side, the company just levelled its dividend payout, forgoing a rise for the first time since -- ulp! -- I was born. The speculation is that the company is hoarding cash, ready to strike. It's worth pointing out that Pfizer-Amgen (Pfigen? Amzer?) is not a new suggestion. Credit Suisse's Catherine Arnold was batting around the same idea in March. (But then, Arnold also said Sepracor might be a target, and that didn't happen either.)
The major difference between March and now is that in March Amgen was cheap, trading near $40. Now, Amgen is expensive, trading above $55 since August. If Pfizer is to offer a premium to Amgen shareholders, that premium just got much more expensive. Thus the financial damage to Pfizer in terms of lost cash, extra debt and a downgrade of its credit rating would be greater now than had Pfizer acted in spring.
Second, Amgen isn't a problem-free acquisition, and we're not talking about its legal problems. Sales of Aranesp were crimped last quarter. Sales of Epogen have flattened. Enbrel will face competition from a Centocor-marketed rival in 2009. An upcoming ruling by the FDA could reduce Vectibix's sales. And many of these brands have been on the market a long time -- meaning their patent lives aren't that long. (Epogen was approved in 1989, Neulasta in 1991, Enbrel in 1998, Aranesp in 2001.) Yes, Amgen has five drugs in its phase 3 pipeline, but pipeline drugs carry a cashflow uncertainty that approved drugs do not.
So there's a question of how long it would take Pfizer to earn back the $61 billion-plus that Amgen would require. Don't forget that Roche has been unable to raise the $45 billion it needed to get Genentech. Pfizer will need access to the credit market because it holds only $26 billion in cash.
Another unfortunate variable for Pfizer is that Amgen is locked into a profit-share agreement with Wyeth that costs Amgen one third of its entire sales and marketing budget. The cost of that agreement is rising:
Wyeth profit share expenses increased 22 percent to $298 million in the third quarter of 2008 versus $245 million in the third quarter of 2007. The Company still expects Wyeth profit share to be one third of adjusted SG&A expenses for the full year 2008.That agreement -- which Pfizer would presumably remain bound by post-acquisition -- is having a deleterious effect on the productivity of Amgen's sales reps. Amgen earned a respectable $4.31, for every dollar spent on sales reps last quarter. But that yield is down from the year before, when Amgen earned a sterling $4.95.
Pfizer, by contrast, earns $3.40. That's much less, but it's trending up over time, based on CEO Jeff Kindler's ruthless efficiency drive (and tons of layoffs). In other words, a Pfizer-Amgen pairing would put together a company that is becoming less efficient over time (Amgen) with one becoming more efficient (Pfizer).
This would go completely against Kindler's long-held belief that Pfizer needs to remake itself from the ground up as a smaller, more nimble, more entrepreneurial, cancer-focused company. As such, an acquisition of Amgen would reek of the adventurism shown in the Lilly-ImClone deal.
Only one thing is for sure: if enough analysts name enough Pfizer target companies then eventually one of them has to be right.
- Want more of BNET Pharma's "Worst-Case Scenarios"? Click here:
- 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