Unexpectedly, Pfizer and Merck Show That Mega-Mergers Can Work -- At Least So Far
It's a truism you hear from the corner office to the cubicle: "mergers create efficiencies." The Q1 2010 earnings results from two pharmaceutical companies that recently went through huge mergers -- Pfizer (PFE) acquired Wyeth and Merck (MRK) bought Schering-Plough -- show that maybe the cliche exists for a reason: Both companies became noticeably more efficient after they merged, if their financial disclosures are to be believed.
This isn't an obvious result. The flipside of the "mergers create efficiencies" argument is that mega corporations are lumbering mammoths, waddling across the veldt of American capitalism just waiting to be taken down by the nimble, sabre-tooth tigers who work at smaller, more entrepreneurial companies.
Pfizer-Wyeth and Merck-Schering suggest those tigers better be nimble indeed: You can see the results of the mergers in these two charts, which I've created based on Pfizer and Merck's SEC disclosures. The charts measure how much money each company gets for every dollar they spend on sales, marketing and administrative costs. In other words, how well do these companies use their current resources to sell the products they have on hand right now? (Or at least over the last three months.)
Pfizer now gets $3.78 for every buck it pays for staff, marketing and overhead. Before the merger, it got an average of $3.29.
Merck got $3.52. Before the merger it got an average of $3.26.
It's not just the case that the new companies are more efficient than the ones they acquired. The acquirers are also more efficient now than they were on their own.
There are some caveats: You'll notice that Pfizer's Q1 is cyclically always it's best performance. The real test will be a year and two years from now. Also, both these companies face patent cliffs -- a lot of their top products such as Lipitor and Cozaar have lost market exclusivity and now face devastating cheap competition. So we're looking at two companies in the prime of their lives.
Because of that patent cliff, both companies face a race to the bottom in which the challenge will be to cut staff and overhead costs faster than their revenue falls. That's already happening: Pfizer said it would ax 20,000 jobs at its combined operations and Merck will lop off 16,000.
Related:
- Merck's Munificence: Ex-Schering CEO Fred Hassan Walks Away With $50M
- Why Pfizer Is Emerging as the Good Guy in Drug Tests That Killed 11 Children