Attack of the Monster Merger - Pharmaceutical Executive


Attack of the Monster Merger

Pharmaceutical Executive

The Need to Be No. 1

Pfizer's strategic about-face—from small-is-beautiful back to bigger-is-better—has a certain inevitability about it. Tim Anderson, MD, an analyst at Sanford C. Bernstein, compares it to an addiction. "I almost wonder if Pfizer is caught in a slow, vicious M&A cycle whereby every handful of years it'll have to buy another company to keep growing," he says.

"This is just Pfizer being Pfizer," says Michael Latwis. "It's in their culture to grow through big acquisitions, and Wyeth is just the right size and shape."

Megamergers are what got Pfizer to No. 1 in the first place. The Warner-Lambert deal for $90 billion in 2000, followed in 2003 by the $60 billion Pharmacia purchase, are both generally viewed as textbook examples of how to destroy shareholder value. In what insiders call a "loot and scoot," Pfizer grabbed a single outstanding product that was the goal of the purchase—Lipitor and Celebrex, respectively—and essentially ditched the rest of the company. Most notably, Pfizer axed almost all of Pharmacia's oncology pipeline, including longstanding R&D operations at the former Upjohn and Parke-Davis sites that had continued to operate with autonomy under Pharmacia.

"Like other pharma megamergers of that era, the primary mechanism of creating value was massive cost reduction," says Charles Farkas. "But taking out billions of dollars in commercial and research resources can be very costly in terms of lost innovation and productivity."

Pfizer's masterful marketing of Lipitor achieved sales far exceeding expectations, but Celebrex, a Cox-2 inhibitor like Vioxx, got snagged in safety scares. But for all of its troubles, Pfizer's market cap is no higher than it was a decade ago.

Living down that history will be hard for Pfizer. "This merger will not have a happy ending," says Peter Young. "The real problem is that Pfizer is afraid to get small, but it's going to have to get smaller anyway in a few years."

Pfizer is scheduled to drop $12 to $13 billion in annual sales when Lipitor loses patent in 2011—that's 28 percent of Pfizer's total sales for 2008. Once torcetrapib bombed, Kindler lost his only sizeable Lipitor backup—and with it, Pfizer's future hold on No. 1. According to Frost & Sullivan projections, Roche (including revenues from its majority Genentech share) was scheduled to overtake Pfizer in 2012, and Novartis, Sanofi, and Glaxo were set to follow by 2015. Given Pfizer's ragged late-stage pipeline, slashing jobs, shuttering plants, and shopping until it dropped for any remaining Phase III diamonds in the rough could not stop the slippage. Merely continuing to rightsize Pfizer to No. 5 would likely have earned Kindler his golden parachute and the order to jump.

Roche's move to buy the rest of Genentech may only have accelerated the sense of urgency. Analysts such as Frost & Sullivan's Shabeer Hussain see this development as the decisive factor in Kindler's appreciation that Wyeth was, as he has repeatedly proclaimed, "the right deal at the right price at the right time." "When Roche announced that it was taking over Genentech, it left no doubt that Pfizer would finally have to yield the No. 1," Hussain says. "That would have had the necessary effect of concentrating Kindler's mind."

Not so, says Ray Kerins, head of Pfizer's global communications. "Years ago Pfizer might have focused on that, but it's different now," he says. "Folks can rank us left, right, and center, but our goal is bringing the best science to the marketplace." And why the wait? "We could not have done a deal like this a year ago," Kindler told the AP. "The company wasn't strong enough yet."


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