Attack of the Monster Merger - Pharmaceutical Executive


Attack of the Monster Merger

Pharmaceutical Executive

Debate Over Deal Drivers

For all Kindler's cheerleading about remaining the industry leader, he has taken great pains to preempt his critics by emphasizing that the merger is about strategy, not size.

Some experts buy it. Says Stan Bernard, MD, president of Bernard & Associates: "Unlike its two big previous acquisitions, which were about acquiring huge blockbuster products, this is about entering huge new markets." He sees the merger as a potential industry game changer, the era driven by small molecules and physician detailing finally yielding to large-molecule drugs and a focus on payers.

Goldman Sachs analyst Jami Rubin agrees. "Wyeth boasts one of the industry's most impressive biotech assets: biologicals and vaccines. We continue to believe that these represent the key growth drivers for pharma in the coming years."

With biologics growing by an annual 13 percent and vaccines by 18 percent (compared to small molecules' 2 to 3 percent), Pfizer gained an immediate footprint in these markets. "This acquisition should be the shot heard round the industry," Bernard says. "Now the big vaccine producers know that Pfizer, with all its marketing muscle, is coming after them."

The one benefit of the merger no one disputes is fast revenue: Pfizer immediately pockets $20 billion from Wyeth's diverse portfolio of products. "Buying Wyeth buys Pfizer time," says Chuck Farkas. "It adds Enbrel and Prevnar, both of which have lives beyond their patent expiration. What it doesn't buy is much pipeline."

Pfizer's top line jumps from a pre-merger $40 billion to the combined company's $60 billion (for Rx drugs alone) or $70 billion (including consumer health and veterinary meds). In addition to diluting the 28 percent of sales lost after generic Lipitor hits, the merger will give Kindler economies of scale. The planned layoffs, estimated to save $4 billion, are generally assumed to be only the beginning.

"It goes without saying that efficiencies in the cost base within the sales organization were a key driver in this deal," says Manhattan Research President Mark Bard. "Pfizer is going to cut as many as it can—and eventually go to a contract sales force that it can hire and fire at will." All told, Datamonitor forecasts that post-merger Pfizer will eke out a profit of 0.9 percent over the next four years—a sign of progress when compared to its estimated pre-merger loss of 5.3 percent for the same period.

Buying time also gives Kindler a chance to deploy Pfizer's marketing mavens to sell the hell out of rheumatoid arthritis drug Enbrel and meningitis vaccine Prevnar (each scored $2.8 billion in 2008 sales), rush a few big online products to market, and ramp up biologics and vaccines. "As a scale player, Pfizer can generate dramatically more earnings out of Wyeth than Wyeth can alone," says Deutsche Bank analyst Barbara Ryan.

Despite all, Pfizer may still lose its No. 1 ranking. "Profits will look terrific in 2010 simply by adding Wyeth sales," says Albert Wertheimer, director of Temple University's Center for Pharma Services Research and Pharmacoeconomics. "But in 2011, just when Lipitor is expiring, Pfizer will have a much higher revenue baseline to make."

Kindler says Pfizer can do it.

No, it can't, says Datamonitor analyst Simon King, among others. The patent cliff will make $70 billion in annual sales increasingly tough to top. By 2013, Pfizer's priapic phenom Viagra will lose its exclusivity—and $1.9 billion in annual sales. So will Lyrica ($2.5 billion), Detrol LA ($1.2 billion), Caduet ($589 million), and Aricept ($480 million). And Wyeth has its own patent casualties. Although its two top sellers, Prevnar and Enbrel, are safe barring fast follow-on legislation, both Effexor XR ($39 billion) and Protonix ($764 million) go generic in 2010. Frost & Sullivan's Hussain projects that Pfizer will lose at least $21 billion to patent expirations by 2013.

Still, diversification will soften the blow. While total pharma sales will drop by 2.3 percent in 2013, according to Datamonitor, total company sales will slide by only 0.6 percent. That's an improvement over any pre-merger projections, but negative sales growth is what got Kindler to the deal table in the first place.

Cliff Cramer, director of the Healthcare and Pharmaceutical Management Program at Columbia Business School, questions even the fast-revenue rationale. "The deal is unlikely to contribute [Kindler's projections] to top-line growth near term," he says. Along with the costs of disruption to R&D, "the 30 percent premium Pfizer paid will require even more aggressive cost-cutting to make the deal accretive to earnings within two or three years."


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