By William Patalon III
Money Morning/The Money Map Report
Pfizer Inc (PFE) plan to buy rival U.S. drugmaker Wyeth (WYE) for about $68 billion is a case of “the dead buying the dying,” and won’t provide the revenue growth that Pfizer needs and is seeking, top takeover expert Louis Basenese says.
The New York, N.Y.-based Pfizer, the world’s No. 1 drugmaker, announced last Monday that it would buy Wyeth in a strategic move to diversify its revenue base. To help finance the cash-and-stock deal, Pfizer said it would cut its dividend and use about $22.5 billion in debt that it raised from a consortium of global banks.
Pfizer said the deal is key because it needs to find a way to cope with a major revenue gap that will emerge in 2011, when its blockbuster cholesterol-treatment drug, Lipitor, will begin to face U.S. generic competition, Reuters reported. Next year, Wyeth loses patent protection on its own top drug, the anti-depressant Effexor XR.
“With Lipitor set to come off patent, Pfizer desperately needed growth. Instead they bought Wyeth – a company with a similar patent expiration looming,” says Basenese, a longtime mergers-and-acquisitions expert who is the editor of the Takeover Trader andnewsletters. “Sure the deal hands [Pfizer] the recurring and reliable revenue stream of Wyeth’s vaccine business. But investors are looking for big pharmaceuticals to acquire or discover big blockbusters. Anything less will do little to revitalize their moribund stock prices.”
As Basenese noted, the addition of Wyeth's big-selling Prevnar vaccine for childhood infections and Enbrel rheumatoid arthritis treatment would help Pfizer diversify into vaccines and injectable biologic medicines. Pfizer would also realize major cost savings by streamlining areas that overlap.
For each share of Wyeth, Pfizer will pay roughly $50.19 – $33 in cash and 0.985 of a share of its stock. Based on Wyeth's 1.33 billion shares outstanding as of Oct. 31, the deal would be valued at about $66.8 billion. Including Wyeth's stock options, the deal would be worth $68 billion, published reports state.
At $50.19 per share, the offer would represent a 15% percent premium over Wyeth's closing stock price of $43.74 on Jan. 23 (Friday), the last closing price before last Monday morning’s offer. Wyeth's stock had surged 12.6% that Friday on news of the possible deal.
The deal is expected to add to Pfizer's adjusted diluted earnings per share in the second full year after closing and to result in cost savings of $4 billion by the third year.
Pfizer’s Jan. 26 announcement that it would buy Wyeth brings back memories of past Pfizer acquisitions – many of which are more nightmares than memories. The mega-mergers with Warner-Lambert for $90 billion in 2000 and Pharmacia for $60 billion in 2003 are two of the best examples.
Those acquisitions have been roundly criticized for two key reasons: The brutal staff cuts and, even worse, the fact that Pfizer never realized any performance gain.
There are eerie similarities with the Wyeth deal. Pfizer acquired Warner-Lambert mainly for the cholesterol-lowering drug Lipitor, which went on to become the world's best-selling drug. Pfizer went after Pharmacia primarily to acquire Celebrex, a top-selling pain pill. But Celebrex was in the same drug class as Merck & Co. Inc.’s (MRK) troubled Vioxx, and when that drug was pulled from the market for safety reasons back in 2004, sales of Pfizer’s Celebrex dropped like a stone.
Most unforgivable of all: Pfizer's stock has slid more than 50% since the Warner-Lambert deal.
Deep cost cuts are part of the plan for the post Pfizer-Wyeth company: Although Pfizer Chief Executive Officer Jeffrey B. Kindler, who took the top job in 2006, insists the Wyeth deal is different from the earlier mergers because the Wyeth deal is not about "a single product or cost-cutting …it's about creating a broad, diversified portfolio."
But cost-cutting will still be a key ingredient of this deal. The $4 billion in “synergies” it expects to get by 2012 will enable it to cut the combined work force of the two firms by some 20,000 jobs, or about 15%. As soon as the deal was announced last week, Pfizer said it would cut 8,000 jobs, or 10% of its workforce, while closing five of its 46 manufacturing plants.
“For $68 billion, Pfizer could have scooped up a dozen … or more … compelling biotechs with greater growth potential,” Basenese said. “I think it would have been a more prudent use of capital considering the company’s checkered history of buying big companies – such as Warner-Lambert and Pharmacia – and struggling to integrate and grow.”
The True Pathways to Profit in the Biotech Sector
Basenese can’t help but wonder if Kindler, the Pfizer CEO, might not be suffering from a form of “Novartis envy.”
“Recall, not long ago Novartis AG (ADR: NVS) entered the vaccine business by purchasing Chiron,” he said. “Then it ramped up a biologics business in late 2007. Wyeth covers those bases for Pfizer. And by that token, next up should be a big splash into generics to match Novartis’ purchase of Sandoz.”
Although acquisitions will remain a shortcut to growth for major pharmaceutical companies, Basenese advises investors to avoid possible rebound plays. Better to play the possible takeover targets themselves, the takeover expert says.
“Genzyme Corp. (GENZ) should be atop almost every list. It focuses on rare diseases – a niche that lends itself to less competition and higher margins. Plus, many of its drugs possess the ability to treat multiple diseases,” Basenese said. “For instance, cancer drug Campath also demonstrated long-term efficacy in treating multiple sclerosis. High margins and multiple revenue streams is a plus for any business. Not to be overlooked either is Genzyme’s impressive pipeline, which just delivered another big winner in Mozobil.”
When evaluating potential biotech investments, make sure to look at the company’s drug pipeline. And true speculators should cherry pick small biotechs in collaboration with larger ones on late stage trials.
[Editor’s Note: Louis Basenese is a regular contributor to Money Morning, both as a writer and as an expert on the dealmaking market. To find out more about Basenese, or to check out his please click here.], . For an overall analysis of the outlook for more buyouts in a story that appears elsewhere in today’s issue of Money Morning,
News and Related Story Links:
Pfizer to buy Wyeth for $68 billion.
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The U.S. Market for Deals Remains in a Deep Freeze.
Wyeth withdraws from Crucell takeover talks.
Pfizer CEO: Wyeth Takeover Will Be Different.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.