Saturday, 31 January 2009

Ruminations on the Pfizer-Wyeth Merger

Amidst all the economic doom and gloom coming out of Washington, London and Davos (I think they had to do without Sharon Stone and Angelina Jolie this year), this week's announcement of the Pfizer-Wyeth merger was notable. If consummated, the $68 billion merger will be the largest business wedding of its kind in the pharmaceutical industry. The fact that deal is being made in the current economic climate is all the more remarkable. Based principally on a New York Times podcast of the proposed transaction, the principal reasons for the merger seem to be driven by three main factors.

First, patent protection for Pfizer's main product, LIPITOR, the cholesterol drug, is set to expire in 2011. LIPITOR is reported to constitute 25% of Pfizer's revenues. While the lapse of patent protection does not necessarily mean that sales of LIPITOR will totally then cease, it appears that Pfizer will face significant competition from generic competitors. We like our MBA students to consider that a powerful brand may enable a patented drug to successfully withstand the loss of patent protection. If the LIPITOR mark cannot accomplish this in a big way, then maybe it is time to stop relaying the story how the NutraSweet saved the post-patent day for Aspartame, since it will be no longer relevant.

Second, Pfizer seems to have relatively poor product prospects in its pipeline, so it has to look elsewhere. Much has been written during the last several years over the increasing inability of Big Pharma to come up with a new generation of products. Wyeth appears to provide a partial solution for at least two reasons.

The end of the patent pipeline?

First, Wyeth is reported to be particularly strong in the vaccine area and in biotech (where one report had the company listed as no. 3 in the industry). Second, Wyeth continues to enjoy revenues from the well-known OTC pain reliever--ADVIL. Assuming that there is no patent protection that is about the expire, it would seem that ADVIL promises a continued flow of revenues irrespective of any special IP coverage. Left unclear is whether Wyeth's patent prospects are materially better than those of Wyeth and doubts have been expressed.

Third, there is a view that economic forces are driving Big Pharma towards merger and consolidation. The rationale for this is not fully convincing. I imagine that size and resources may have advantage, at least to some extent in R&D and product development, not to mention marketing and advertising.

Bigger may not be better ...

That view is, however, not universally accepted. On August 24, 2007, an article appeared in Fortune by John Simons entitled "Why a Pfizer-Wyeth Merger is a Bad Idea." Simons concluded as follows:

"The Pfizer/Wyeth merger scenario is far-fetched, particularly because Pfizer would inherit another troubled pipeline and more big-sellers whose patents expire in the same concentrated period of 2010 and 2011. "Would the idea behind the merger be that misery loves company?" queries Standard & Poors pharma analyst, Herman Saftlas. "Most mergers in this sector haven't panned out from an earnings growth perspective. But even worse, these two companies are in the same boat."

Perhaps Simons was wrong in his analysis in 2007. If so, one wonders why the deal did not take place then. Alternatively, if Simons was correct 16 months ago, then what has changed since then, other than financial meltdown, cash flow misery, and the cratering of the real economy, that now makes the merger more compelling? The answer is not clear.

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