Here Come Pharma's 'Me-Too' Mergers

Pfizer Inc.'s (PFE) success with Viagra spurred what drug industry critics call "me-too" drugs -- products that piggyback on an established drug's success without providing much scientific or clinical advancement. For another example, just look to all the anti-cholesterol statins on the market.

Now drug executives are preparing the market for "me-too" mergers following Pfizer's $68 billion acquisition of Wyeth. Since the deal was announced on Jan. 26, Roche Holding AG (RHHBY.PK) has revised its longstanding bid for Genentech Inc. (DNA) from $44 billion to $42 billion and vowed to take it hostile after months of fruitless negotiations with a special Genentech committee.

Then the Financial Times reported Feb. 1 that the new Sanofi-Aventis (SNY) CEO Chris Viehbacher told employees he's on the prowl for an acquisition, which many investors took to mean Bristol-Myers Squibb Co. (BMY) judging by BMY's stock movement, up 8% this week.

Then Tuesday, Merck & Co. (MRK) CEO Richard Clark weighed in on his year-end earnings call, telling listeners he wouldn't rule out a large acquisition. "I don't think in today's world, any CEO can categorically rule out any type of transaction," he said, but noted that a deal would have to "support a strong dividend," which refers, consciously or not, to Pfizer's decision to cut its dividend in half to help pay for the Wyeth deal. The cut sent investors fleeing Pfizer stock, which is down 14% since the announcement.

Novartis AG (NVS) chief Dan Vasella also aired his thoughts on a call and said "there could be more deals," but not on his part: "I don't see any transformational deals for Novartis in the near future." Which leads us to comment, it all depends on how you define "transformational" and "near," doesn't it? - Alex Lash

Comments

[drone]

I just sold all my shares in PFE, what a money losing dig this has been.

2009 Feb 06 05:09 PM

[drone]

dog, money losing dog.


On Feb 06 05:09 PM Borscht wrote:

> I just sold all my shares in PFE, what a money losing dig this has
> been.

2009 Feb 06 05:11 PM

[drone]

Viagra, what did that do for me?

2009 Feb 06 09:43 PM

[drone]

This one ranks up there with BA and GE, large cap American pieces of crap.

2009 Feb 06 09:45 PM

[Furd Turgeson]

8 billion a year for R & D out of pfizer a year. Impressive.

2009 Feb 06 11:26 PM

[Wide Moat Investing]

Hey, sure, PFE cut the dividend--but didn't they get a great business at a decent price? Now their revenue worries are largely gone. And the remaining company is now cheap, cheap, cheap--about 5x FCF after you back out cash and current assets.

2009 Feb 07 12:44 AM

[donzelion]

With the massive flurry of smaller biotechs out there, the big guys are going after other big guys, rather than picking up hordes of small players that should be "great values" (if one believes the investor newsletters, that is).

Is it that the big pharms can't smell a profitable drug as well as an investor newsletter can, or is there something more fundamental at work in the pharm industry, with the big players planning for lean times ahead?

I'd opt for the latter, and it looks to me to compare with big oil's consolidation in the 90s. Given the fundamental distinctions in the industries, the comparison seems odd - but massive size begets massive political clout - so maybe that's the objective here.

2009 Feb 07 07:31 AM

[prudentinvestor]

I have long-standing positions in both WYE and PFE.

In the recent past, I substantially increased my holding of WYE, when it dropped to what I believe is a good approximation of its true intrinsic value, $27-$30/share. So, as a WYE shareholder, I am very pleased to receive such an astonishing premium.

As a PFE shareholder, however, I am shocked to see the dividend halved, for the sake of paying an absurd premium for WYE. Yet another example of incompetent management making cowboy decisions, enabled by a board of zombie directors, and by banks trying to "lend money" to satisfy TARP!

One would have thought that in any decent system of corporate governance, a decision to acquire a competitor for over $60bn would be contingent upon a shareholders' vote, but, I understand that our incompetent, loose-gun-on-the-deck employees (PFE's management), who manage OUR COMPANY on OUR BEHALF, already signed a deal, with a $4bln breakup fee, without consulting us.

So, when you say there are more deals to come, I hope that the companies in which I hold stock are the ones who get acquired by idiots who run other companies. Owning stock in the acquiring company has mostly been a losing proposition for its shareholders.

2009 Feb 07 08:55 AM

[nova]

The big Pharma lost its vision and ability to be innovative. Consequently, their preferences are to become 'pharmaceutical utilities'.

It offers large compensations to its executives but no any new outstanding or revolutionary drugs for patients.

2009 Feb 07 11:42 AM

[Jolly_Rancher]

BP management is predictably acting in its own self interest just like management from other sectors. The agenda is to buy into big cash flows that will support management's lavish lifestyles. So Wide Moat, you are correct in that the cash looks good, but management is going to "back out" those cash flows right into their pockets -- Lear jets, stock options, expensive travels and office renovations, etc. Dividend? Cut in half. R&D? Nonexistent.

2009 Feb 07 11:42 AM

[Tom B]

Big Pharma should be seeding start-ups instead of buying other lumbering, high-overhead dinosaurs. But these cretinous MBA's are all monkey see; monkey do.


On Feb 07 07:31 AM donzelion wrote:

> With the massive flurry of smaller biotechs out there, the big guys
> are
going
> after other big guys, rather than picking up hordes of small
players
> that should be "great values" (if one believes the investor
newsletters,
> that is).
>
> Is
it
> that the big pharms can't smell a profitable drug as well as an
investor
> newsletter can, or is there something more fundamental at work
in
> the pharm industry, with the big players planning for lean times
ahead?
>
>
> I'd opt for the latter, and it looks to me to compare
with
> big oil's consolidation in the 90s. Given the fundamental
distinctions
> in the industries, the comparison seems odd - but massive
size
> begets massive political clout - so maybe that's the objective
here.

2009 Feb 09 08:58 AM

[User 353578]

It looks like Pfizer is serious this time.

Subject: FW: Pfizer in the News
PFIZER TO CUT WORKFORCE 120 PERCENT

NEW YORK, N.Y. (AP.com) - Pfizer will reduce its workforce by an
unprecedented 120 percent by the end of 2009, believed to be the first
time a major corporation has laid off more employees than it actually
has.
Pfizer stock soared more than 12 points on the news.

The reduction decision, announced Wednesday, came after a year-long
internal review of cost-cutting procedures.The initial report concluded
the company would save $1.2 billion by eliminating 20 percent of its
108,000 employees.

From there, said a spokesperson, "it didn't take a genius to figure out
that if we cut 40 percent of our workforce, we'd save $2.4 billion, and
if we cut 100 percent of our workforce, we'd save $6 billion. But then
we thought, why stop there? Let's cut another 20 percent and save $7
billion.

"We believe in increasing shareholder value, and we believe that by
decreasing expenditures, we enhance our competitive cost position and
our bottom line," he added.

Pfizer plans to achieve the 100 percent internal reduction through
layoffs, attrition and early retirement packages. To achieve the 20
percent in external reductions, the company plans to involuntarily
downsize 22,000 non-Pfizer employees who presently work for other
companies.

"We pretty much picked them out of a hat,".

Among firms Pfizer has picked as "External Reduction Targets," or ERTs,
are Quaker Oats, AMR Corporation, parent of American Airlines, Lockheed,
Boeing, and Charles Schwab & Co. Pfizer's plan presents a "win-win" for
the company and ERTs, said Chris, as any savings by ERTs would be passed
on to Pfizer, while the ERTs themselves would benefit by the increase in
stock price that usually accompanies personnel cutback announcements.

"We're also hoping that since, over the years, we've been really helpful
to a lot of companies, they'll do this for us kind of as a favor,".

Legally, pink slips sent out by Pfizer would have no standing at ERTs
unless those companies agreed. While executives at ERTs declined to
comment, employees at those companies said they were not inclined to
cooperate.

"This is ridiculous. I don't work for Pfizer. They can't fire me," said
Kaili Blackburn, a flight attendant with American Airlines.

Reactions like that, replied the Pfizer spokesperson "are not very
sporting."

Inspiration for Pfizer's plan came from previous cutback initiatives,
said company officials. In January of 1998, for instance, the company
announced it would trim 18,000 jobs over two years. However, just a year
later, Pfizer said it had already reached its quota. "We were quite
surprised at the number of employees willing to leave Pfizer in such a
hurry, and we decided to build on that,".

Analysts credited the short-term vision, noting that the announcement
had the desired effect of immediately increasing Pfizer's share value.
However, the long-term ramifications could be detrimental, said Morgan Stanley analyst Beldon McInty.

"It's a little early to tell, but by eliminating all its employees,
Pfizer may jeopardize its market position and could, at least
theoretically, cease to exist," said McInty.

The spokesperson, however, urged patience: "To my knowledge, this hasn't
been done before, so let's just wait and see what happens."

2009 Feb 09 09:08 AM

[tagthatstock]

Novartis AG (NVS) chief Dan Vasella also aired his thoughts on a call and said "there could be more deals," but not on his part: "I don't see any transformational deals for Novartis in the near future." Which leads us to comment, it all depends on how you define "transformational" and "near," doesn't it? - Alex Lash

i think what he meant by the remark is he can do small deals buying other companies while his stock is well underpriced to the sector......on anal math alone it would be trading at $55+,,,,,on buyout math it would be trading at $200............so,,,,... would buy them out? JNJ?

a few days ago someone bought a ton of feb45 calls and several other months too for nothing,,,,,,,odds favor buying further out than feb but crazy things have happened on options expire week.

CALL OPTIONS Strike Price at 45.00

Expires Symbol Last Chg Bid Ask Vol Open Int
Feb 09 NVSBI.X 0.13 0.00 0.05 0.15 4 2,017
Mar 09 NVSCI.X 0.35 0.00 0.25 0.40 1 1,386
Apr 09 NVSDI.X 0.75 0.10 0.65 0.85 16 1,932
Jul 09 NVSGI.X 1.57 0.08 1.50 1.80 15 606
Jan 10 LYYAI.X 3.00 0.00 3.00 3.50 1 124
Jan 11 ZAHAI.X 4.60 0.00 4.40 5.30 20 70

2009 Feb 14 08:04 AM