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The Pfizer-Wyeth Deal Worst-Case Scenario

UPDATE: The deal is done! Pfizer will get Wyeth for $68 billion. See BNET's look at the deal here. Meanwhile here's the pre-deal analysis:

Folks are freaking out right now on CafePharma -- sample quote on the Wyeth board: "You're Pfucked!" What will the new company be called, Pfyeth? Wyther? Wyzer? More importantly, let's do our traditional BNET analysis of this potential deal and ask, What's the worst-case scenario?

Here's the logic for the deal as expressed in the WSJ:

a deal could create billions in cost savings through the combination of back-office operations, research and development, sales and manufacturing.
But could it? If you compare both companies' expenses to their revenues, it turns out that the fat is all on Pfizer's side. Consider:

Wyeth is currently getting $3.56 in revenues for every dollar in sales, general and admin expenses per quarter. That return is the highest it's been since the beginning of 2007. This is a company that's getting more efficient by the quarter.

Pfizer is getting only $3.40, although it too is trending up. So the two are similarly efficient at turning sales and marketing into revenues, but the most promising cuts still lie within Pfizer and not Wyeth. (That's a chilling thought if you're a Pfizer sales rep, because those pfolks know that Pfizer has laid off about 15,000 people in the last two years in an attempt to save $2 billion in costs.) So why depress Pfizer's stock even further and cause years of managerial turf-war chaos if Pfizer can make those cuts on its own and not have to shower Wyeth shareholders with a deal premium?

Now look at R&D expenses. I'm a skeptic about attempting to figure out the "productivity" of R&D as sales dollars emerge only years or decades after the research dollars were spent. But as a measure of each company's spending habits, note that Wyeth's R&D spend is 14-15 percent of revenues. Pfizer's is 16 percent. Again, the fat seems to be on the Pfizer side, not the Wyeth side.

And yet R&D efficiencies are another reason cited for the deal:

it would allow the industry to slash research-and-development spending, which accounts for nearly 20% of sales at many companies.
Unless these R&D departments are filled with paper-pushers and not scientists, then slashing R&D can ultimately lead to only one thing: reducing the number of new drugs you produce. It doesn't matter if the expenses are internal or for acquisitions. Drugs costs money. No R&D money, no new drugs. So, again, that raises the question of whether merging for a one-time saving on the elimination of duplicate tasks is really worth it.

Look at the efficiency drive Pfizer has already been through and assume that the same could be repeated post-merger: Is a one-time $2 billion saving enough to make a difference in a combined entity that has $70.8 billion in revenues every year?

Now consider history as a guide. Pfizer is historically bad at deals. The WSJ notes, archly:

Critics have lambasted Pfizer's 2006 sale of its consumer business, which included the Listerine, Visine and Lubriderm brands, as well as nonprescription drugs Sudafed and Nicorette. That unit is now helping its buyer, Johnson & Johnson, weather problems in its own prescription drug business.
A Wyeth buy would bring Pfizer Advil, Robitussin and ChapStick, essentially putting it back in the businesses it sold four years ago. What a waste of investor dollars that maneuvering would turn out to be (unless you're a J&J holder)!

And don't forget Pfizer's acquisition of Pharmacia. That was the company that made Celebrex -- whose sales promptly tanked as soon as the Vioxx scandal broke.

Harvard Business School's Gary Pisano told the WSJ:

The record of big mergers and acquisitions in Big Pharma has just not been good. There's just been an enormous amount of shareholder wealth destroyed.
The deal would, however, satisfy Pfizer's craving for weird, pop-culture-driven drugs like Viagra, the penis-straightening drug Xiaflex, and the bong-like Exubera. (The company has also burned millions pursuing failed sleeping pills and obesity treatments.) In those lights, Wyeth is a candidate because of its recent deal with Thiakis to obtain its anti-obesity drug candidate, TKS1225. You can see why history suggests this is a waste of time and money here.

The most interesting part of the deal is Wyeth's pact with Elan, maker of Tysabri, the anti-MS drug. In a merger, Pfizer would get access to revenues from Alzheimer's drug bapineuzumab. But that company has a troubled management. There's a lot of risk.

Bottom line: This onlooker's gut reaction could turn out to be right:

"Pfizer still has significant problems, so from Pfizer's perspective this is a good idea," said Chris Albani, a Tokyo- based partner at PRTM who has advised pharmaceutical companies for about 20 years. "From Wyeth's perspective, if I were them, I would try to get out of it."
Image by Flickr user Arturo de Albornoz, CC.
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