5 Reasons Pfizer Shouldn't Buy Wyeth 23 comments
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Reasons to buy Wyeth (WYE)
- Misery loves company.
Reasons not to buy Wyeth
- Doesn’t come close to solving Pfizer’s (PFE) near term need for late-stage pipeline drugs
- Major mergers in pharma almost always destroy shareholder value (Pisano, 2007).
- Fails to address lack of internal R&D productivity (i.e., not a “disease modifying” business move but rather, a superficial band-aid).
- Opportunity cost is too high; Pfizer could buy 10 innovative companies for the cost of 1 Wyeth (e.g., Shire, BioMarin, OSI, Allergan, Forest…) or, move into generics.
- Wyeth’s marketed / late-stage pipeline has issues: Protonix and Effexor lose patent protection by 2011, bifeprunox and Pristiq have been plagued by issues / slow uptake and will probably never reach the combined $4B in projected sales.
I would be astonished if this deal materialized.
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This article has 23 comments:
They should shut down the R&D except for M&A activities and concentrate on smaller biotech companies and companies with late stage promising products. WYE is too expensive for the potential ROI.
Pfizer is a very sick company with a very incompetent management.
Combining PFE and WYE will do a lot of disservice to shareholders, patients and taxpayers. Today Big Pharma exists/strives not on innovations and/or a competitive business model but rather on a sheer size that allows excess pricing.
It is important to note that the FDA plays an enormously detrimental role in stifling competition and innovations.
Consolidation of Big Pharma is inevitable. Reduced R&D productivity over the past 10 years has set up a scenario where there is too much sales/distribution capacity for the future fewer drugs that are making their way through the FDA approval process. Mergers are a way for management and investors to quickly take capacity out. Sorry to the sales folks who won't continue pulling in $150k+, but they need to find something else to do....I would transition into HCIT and try to get hired by Cerner, Allscripts, etc....companies that are perfectly positioned to help electronify physician's offices with the help of Obama's $40k plus subsidy over five years.
Pfizer faces a massive patent cliff in 2011 with Lipitor (a Wyeth deal helps plug the hole and is an excuse to right size). Wyeth has faced uncertainty on viability of pipeline, including the hailed Alzheimer's programs (de-risk the possibility of development failure). Wonder what happens to Elan?
Synergies in this deal are worth at least $19B alone, assuming $3B run rate cost savings (~30% of WYE combined SG&A and R&D), restructuring expenses of 1.5x * run rate spread over first two years with heavier weighting on first year, 30% blended tax rate, and discounted at a 9% cost of capital...take that out of the $65B Ent Val and you are below $50B unaffected trading value at a time when valuations are at historically reasonable levels (approximate average historical PE is 15x). Feels like a good deal.
To come -- Sanofi acquisition of BMS, GSK acquisition of WYE Consumer (if they can get it unlike their past attempts...JNJ could spoil with a last minute $1B bump too) then AZ.
Bank on. ;)
> jack
On another note, this should put the entire space in play: Im looking @ GILD, BMY, SGP. FRX is as you mention, an attractive candidate as well. How MRK has not yet bought Gilead really surprises me
(1) Do I know more than Pfizer management about what's in Wyeth's pipeline and what the potential value could be? (Anybody who knows better than Pfizer management is entitled to an opinion; anyone else is an arm-chair quarterback)
(2) Do I know more than Pfizer management about what the potential costs and cost savings from the merger? (mergers destroy shareholder value - in the sense that one $110 billion company + one $60 billion company will not result in one $170 billion company...but that's a pretty weak concept of shareholder value...)
(3) Do I know the full scope of the opportunities out there? Pfizer could buy 10-50 companies for the money they're looking to spend on Wyeth. But that doesn't mean they should...
Two turkeys together may not fly like an eagle - but if you take the worst word processor (Microsoft Word version 3.0) and mix it with the worst spreadsheet (Excel v. 2.0), use consistent icons and keyboard shortcuts - you can take over the world. For a time.
I too, plead ignorance (mostly) as to the details of the merger (I employed by no party in these negotiations), and I'll be the first to admit I'm wrong if this merger is a success, but for the time being I'm going resist the urge to have my de facto position be one of confidence in the Pfizer management team.
I guess we'll find out sooner or later.. and again, phenomenal comment.
On Jan 26 05:51 AM donzelion wrote:
> I'm cautiously optimistic about this merger, but I plead (and vehemently
> affirm) ignorance - because:
>
> (1) Do I know more than Pfizer management about what's in Wyeth's
> pipeline and what the potential value could be? (Anybody who knows
> better than Pfizer management is entitled to an opinion; anyone else
> is an arm-chair quarterback)
>
> (2) Do I know more than Pfizer management about what the potential
> costs and cost savings from the merger? (mergers destroy shareholder
> value - in the sense that one $110 billion company + one $60 billion
> company will not result in one $170 billion company...but that's
> a pretty weak concept of shareholder value...)
>
> (3) Do I know the full scope of the opportunities out there? Pfizer
> could buy 10-50 companies for the money they're looking to spend
> on Wyeth. But that doesn't mean they should...
>
> Two turkeys together may not fly like an eagle - but if you take
> the worst word processor (Microsoft Word version 3.0) and mix it
> with the worst spreadsheet (Excel v. 2.0), use consistent icons and
> keyboard shortcuts - you can take over the world. For a time.
It's a fools errand to duct tape the dam together but ignore the gaping hole in the middle that is R&D productivity. I don't disagree that there are cost savings with a merger but that won't fix the gaping hole.
On Jan 25 04:56 PM PharmaBanker wrote:
> The above article is nonsense.
>
> Consolidation of Big Pharma is inevitable. Reduced R&D productivity
> over the past 10 years has set up a scenario where there is too much
> sales/distribution capacity for the future fewer drugs that are making
> their way through the FDA approval process. Mergers are a way for
> management and investors to quickly take capacity out. Sorry to the
> sales folks who won't continue pulling in $150k+, but they need to
> find something else to do....I would transition into HCIT and try
> to get hired by Cerner, Allscripts, etc....companies that are perfectly
> positioned to help electronify physician's offices with the help
> of Obama's $40k plus subsidy over five years.
>
> Pfizer faces a massive patent cliff in 2011 with Lipitor (a Wyeth
> deal helps plug the hole and is an excuse to right size). Wyeth has
> faced uncertainty on viability of pipeline, including the hailed
> Alzheimer's programs (de-risk the possibility of development failure).
> Wonder what happens to Elan?
>
> Synergies in this deal are worth at least $19B alone, assuming $3B
> run rate cost savings (~30% of WYE combined SG&A and R&D),
> restructuring expenses of 1.5x * run rate spread over first two years
> with heavier weighting on first year, 30% blended tax rate, and discounted
> at a 9% cost of capital...take that out of the $65B Ent Val and you
> are below $50B unaffected trading value at a time when valuations
> are at historically reasonable levels (approximate average historical
> PE is 15x). Feels like a good deal.
>
> To come -- Sanofi acquisition of BMS, GSK acquisition of WYE Consumer
> (if they can get it unlike their past attempts...JNJ could spoil
> with a last minute $1B bump too) then AZ.
>
> Bank on. ;)
On Jan 26 07:48 AM RandDChemist wrote:
> Astonished???
It is true that I have a small fraction of the info available to PFE's mgmt, but
based on common sense alone, this deal makes no sense. I am not surprised at the idiots at PFE for exploring this but I am disappointed at
WYE for agreeing. Thanks to Mr. Jacome for a great trading idea: GILD.
Disclosure: shorted WYE Friday.
it's a giant disappointment that pfe doesn't use its cash to buy many innovative biotechs that trade at distressed prices now and are in need for cash.
4-5 years from now, at the latest, this merger will be looked upon as the greates opportunity that PFE mgmt ever killed- go figure. if you owned pfe, that#s the time now to get out.
I wonder what bruce berkowitz at fairholme will do with his huge stake of PFE stock. I could imagine, he hoped and invested for something else than this dumb move by PFE
I absolutely agree that Pfizer can better buy small biotech companies better that giant pharma. Did they forget Pharmacia's big mistake? Warner Lambert meant sinergy, Pharmacia didn't.
What happened to the idea of buying promising products instead of companies?
I was wondering why Pfizer can't sell viagara and it's other drugs as generics when their patents are up. Could they not just leave the drug as is and sell it cheaper? I admit I don't know anything about this..
We see this pattern again and again. First, a company invests in creating great products, and their stock pops higher. Then they cut R&D/technology/mar... to pay a dividend or smooth earnings. Then they try to fix the resulting shortfalls in their product pipeline by purchasing competitors. Then a small competitor invests in creating a great product and the cycle starts all over again.
Often that small competitor gets purchased for an obscene price, by a declining giant with the mentality that they are buying future earnings. The question is, where was the shareholder value created? In the merger or in the creation of great products? Your answer to that question will determine whether you invest in companies that grow by mergers or companies that grow by creating innovative products and services.
On Jan 26 05:51 AM donzelion wrote:
> I'm cautiously optimistic about this merger, but I plead (and vehemently
> affirm) ignorance - because:
>
> (1) Do I know more than Pfizer management about what's in Wyeth's
> pipeline and what the potential value could be? (Anybody who knows
> better than Pfizer management is entitled to an opinion; anyone else
> is an arm-chair quarterback)
>
> (2) Do I know more than Pfizer management about what the potential
> costs and cost savings from the merger? (mergers destroy shareholder
> value - in the sense that one $110 billion company + one $60 billion
> company will not result in one $170 billion company...but that's
> a pretty weak concept of shareholder value...)
>
> (3) Do I know the full scope of the opportunities out there? Pfizer
> could buy 10-50 companies for the money they're looking to spend
> on Wyeth. But that doesn't mean they should...
>
> Two turkeys together may not fly like an eagle - but if you take
> the worst word processor (Microsoft Word version 3.0) and mix it
> with the worst spreadsheet (Excel v. 2.0), use consistent icons and
> keyboard shortcuts - you can take over the world. For a time.
they are _marketing_ companies. That's what's "special" about a drug company: its sales force and their relationships. And a marketing company needs something to sell . . . if they don't have a candidate of their own, then they need to acquire one.
Drug development is "hit or miss" -- and we're coming out of a world where a number of cheaply synthesizable small molecule drugs produced major health benefits for millions of patients (eg the statins, the ACE inhibitors, the SSRIs, the ED drugs), but it appears that we're leaving that world behind. Newer drugs have been harder to synthesize, and are applicable to fewer patients, so it has occurred that several companies with a blockbuster reaching its patent cliff find that they have nothing with which to replace it.
Consequently, rationalization of salesforces and marketing efforts makes a great deal of sense. There are simply too many people-- 100,000 pharma sales reps, all trying to influence about the same number of high prescribing physicians (there are actually more like 800,000 people in the the US who can write a scrip, but pharma concentrates its efforts on the ones who are active . . . the top decile or %20)
Which is exactly why they need to drop the B.S. about how all the beneficial research & development costs must be borne out in higher prices/profit margins charged in the U.S. to counter the lower margins earned elsewhere.
Since there is actually no R&D being carried out, what you are paying for is actually a blizzard of marketing gizmos, gilded lunch meetings, and fat sales commissions. I am not passing judgement on this situation, just asking for some transparency from the pharmas. Is that too much to ask?
On Jan 26 08:58 PM Crocodilian wrote:
> While outsiders often look at drug development as the raison d'etre
> of pharma companies, that's not how they see themselves:
> they are _marketing_ companies. That's what's "special" about a drug
> company: its sales force and their relationships. And a marketing
> company needs something to sell . . . if they don't have a candidate
> of their own, then they need to acquire one.
>
> Drug development is "hit or miss" -- and we're coming out of a world
> where a number of cheaply synthesizable small molecule drugs produced
> major health benefits for millions of patients (eg the statins, the
> ACE inhibitors, the SSRIs, the ED drugs), but it appears that we're
> leaving that world behind. Newer drugs have been harder to synthesize,
> and are applicable to fewer patients, so it has occurred that several
> companies with a blockbuster reaching its patent cliff find that
> they have nothing with which to replace it.
>
> Consequently, rationalization of salesforces and marketing efforts
> makes a great deal of sense. There are simply too many people-- 100,000
> pharma sales reps, all trying to influence about the same number
> of high prescribing physicians (there are actually more like 800,000
> people in the the US who can write a scrip, but pharma concentrates
> its efforts on the ones who are active . . . the top decile or %20)
>