Why a Pfizer Takeover of Bristol-Myers Squibb Seems Unlikely

Deutsche Bank analyst Barbara Ryan left pharma pholks with an interesting wishbone to chew on prior to Thanksgiving -- the notion that large pharma was overdue for consolidation and that Pfizer ought to consider finally merging with Bristol-Myers Squibb. It's not a new idea, of course. But is a Pfizer takeover of BMS realistic? The answer is that Ryan's note may be all stuffing and no meat.

Ryan's logic is based on two facts: That both BMS and Pfizer are facing large patent cliffs around 2010, and of all the companies in a position to acquire, only Pfizer has the scale and the cash to subsume BMS.

Let's take the patent cliff problem first. BMS will lose Plavix and Pfizer will lose Lipitor, brands which are both those companies' biggest sellers. Combining the companies essentially makes that hole twice the size, twice as difficult to fill, with twice the needed level of duplication cuts to produce one-time efficiencies. The stocks of both companies may be better off left alone. BMS and Pfizer are already working together to fill that hole with a new anticoagulant, apixaban. But results from apixaban have been mixed:

Bristol-Myers Squibb and its development partner Pfizer announced in August that the primary endpoint was not met in a Phase III study of apixaban â€" a novel anticoagulant â€" for prevention of venous thromboembolism (VTE) in patients undergoing total knee replacement.

Now look at the cash. It is true that Pfizer is cash-rich. So is BMS. The latter just received $1 billion from its stake of the Eli lilly-ImClone buyout, and it is about to float a minority portion of Mead Nutritionals which will also bring it a large lump of one-time cash. As a takeover target, this makes BMS cheaper for an acquirer because the buyer gains the cash like a rebate on a used car.

But take a closer look at BMS's Q3 numbers. Absent the ImClone cash, BMS would have reported a reduction in earnings per share. Which raises the issue of whether it is wise to acquire a company that is temporarily cash rich if you know that its core business is in decline.

So the two stools of Ryan's argument are wobblier than they first appear. The third element is whether Pfizer is in acquisition mode. As BNET readers know, CEO Jeffrey Kindler has given every sign that he is not. Kindler has repeatedly passed on M&A deals. he has made small deals with small companies. Most of his attention is focused on pruning the more useless parts of his business (like Pfizer's obesity drug). And look what Kindler actually said about M&A in his last conference call:

Roopesh Patel - UBS: Thank you. I have a couple of questions. First for Jeff, I'm wondering if you could please comment on the M&A outlook for Pfizer in light of what's occurred in the stock market in the past couple of months. Specifically, do you believe that acquisition opportunities have increased in the context of current valuation? And related to that, has your thinking on M&A for Pfizer changed over these past couple of months, if so, how?

Jeffrey Kindler - Chief Executive Officer: Okay, thank you Roopesh, good morning. So, let me start on business development. We've been clear that focused business development continue to be an important enabler of all of our growth strategies. And we've said before that we are open to all opportunities and we never say never. I can tell you that under Bill Ringo's leadership, we engage in a very robust and ongoing process to constantly look at all opportunities. And in that process we are always taking account of the very dynamic landscape and the challenges and the opportunities that the environment may create. But while the environment changes, the fundamentals don't change and the considerations I have outlined previously still apply to any deal, large or small. First, it has to have strategic value, the price must be right, it must... we must manage the disruption and risks to productivity. In short, it must create shareholder value, and none of that has changed, as the environment changes, we continue to observe and monitor very carefully and review those opportunities on a constant basis.

We're facing a very significant loss of exclusivity in Lipitor at the end of 2011. We have a clear plan for positioning the company for strong, profitable growth after that. That plan consists of pursuing significant new opportunities for increased revenues starting with our internal pipeline, getting further growth out of our existing products, growing in the emerging markets, growing our business on off-patent products.