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A Ranbaxy Bid Would Smell Like Desperation on Pfizer

Last last week, reports out of India suggested that Pfizer might make a hostile bid for generic-drug maker Ranbaxy Laboratories, which last week agreed to sell itself to Japan's Daiichi Sankyo for roughly $4 billion.

Pfizer may or may not actually try to bust up the Daiichi-Ranbaxy merger -- it's so far declined to comment. But if Pfizer does go down this path, it'll be a fairly clear sign of desperation.

Pfizer logoThere are only two reasons for Pfizer to make a play for Ranbaxy, one sort-of-convincing and the other not at all. The first would be to bolster its own generics business, which is a new frontier of sorts for major drugmakers -- in part because these companies can use their own generic products to delay the entry of other competitors to name-brand drugs that are coming off patent. The delay is only about six months, but that can amount to a big pile of green where blockbuster drugs are concerned.

Given that Pfizer would need to pay a significant premium over Daiichi's bid to actually win over Ranbaxy -- which could easily amount to another billion dollars or so -- it's not at all clear that it makes that much sense, given that Pfizer could probably buy another generic drugmaker, or even bolster its existing in-house generic unit, far more cheaply.

Which leads us to reason number two -- the fact that Ranbaxy is challenging the patents of Pfizer's blockbuster cholesterol drug Lipitor and plans to launch a generic U.S. version in early 2010. Ranbaxy, in fact, won six-month market exclusivity for its generic version of Lipitor, so if Pfizer were to acquire the company, it could conceivably hold onto most of its Lipitor sales for another 180 days.

The problem here is twofold. First, with Lipitor sales running at about $10 billion a year, Pfizer would almost certainly have to spend more to acquire Ranbaxy than it could save. (After the first six months, other generics enter the market, and the high-margin days for a drug like Lipitor are over.) Second, it could alienate Ranbaxy's management in the process, which would devalue the company's usefulness either as a generics maker or as a gateway to the Indian market.

True, Pfizer has been down this path before, as in 1999 when it launched a hostile bid for Warner-Lambert to keep it out of the hands of what is now Wyeth. Warner-Lambert held Lipitor at the time, and while Pfizer had to pay an additional $20 billion for its prize, the drug turned out to be worth it. Warner-Lambert's management was essentially beside the point.

Now, of course, the potential upside for Pfizer is much smaller, and the risk of damaging its target much greater, than it was in 1999. If Pfizer can't see the difference, then "desperation" may be too kind a word by half.

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