The Obama administration's push to drive healthcare costs down may not be all bad news for the biopharmaceutical industry. While the industry yesterday announced/agreed to an $80 billion reduction over 10 years ($8 billion/year) in cost reductions to Medicare, they may be able to recoup a piece of that assuming the uninsured population become covered under a plan that encompasses prescription drug costs. Incremental revenues could jump by $6-50 billion/year based on the assumptions one uses in per capita spend on pharmaceuticals and number of people whom would actually be covered under the plan.

Taking a very conservative midpoint of 20 million incremental increase in covered people and a midpoint spend of $750/year per consumer on pharmaceuticals yields an additional $15 billion per year in revenues which equates to $150 billion over the 10 year life of the program that the industry (generously?) proposed.

There have been 3 mega-mergers in the Pharmaceutical Industry this year (Pfizer (PFE) - Wyeth (WYE); Merck (MRK) - ScheringPlough (SGP); and Roche (RHHBY.PK) - Genentech (DNA)). While these transactions have increased interest in the pharmaceutical sector, we want to speculate on which one makes the most sense. As we don't want to keep you in suspense, we think that Roche is getting the most “bang for the buck”, BUT it is highly dependent on the non-integration of Genentech.

Let's start with the contenders - first Pfizer-Wyeth. No surprise here, we think PFE vastly overpaid to get a potpourri of businesses with a dog's breakfast of vaccines, biotechs, consumers and some underwhelming pipeline potential. It seems to us that the major drive here is “synergy”, that is reducing workforce size by nearly 20,000 while plugging some of the $11-13 billion hole that Lipitor going off patent in 2011 creates. The stock market has not exactly been “irrationally exuberant” about Pfizer's 10 year $258 billion spending spree for Warner Lambert, Pharmacia and now Wyeth and has inversely rewarded share holders with a nearly 70% reduction in market capitalization from the day of the Warner Lambert deal close (Pfizer's market cap about $300 billion) to this week's $95 billion. Need we say more?

Consolidation in the Pharmaceutical and Biotechnology Industry has been grabbing headlines lately and of course we have a strong point of view about how this may shape or mis-shape the industry going forward. While the biggest headlines involve the Pfizer (PFE) - Wyeth (WYE), the Merck (MRK) - Schering Plough (SGP) and Roche (RHHBY.PK) - Genentech (DNA) consolidations, we feel compelled to discuss these and alternatives that may have been considered and the landscape that may develop as a result of these moves.

Let's look at some of the alternative strategies that can be deployed given that most CEOs would acknowledge that the combination of low ROI from R&D investments, patent expirations, demise of the blockbuster model, ineffectiveness of the sales force armies, excess manufacturing capacity, increased regulatory oversight, significant pricing pressures, and the lack of success (failure?) of large consolidations wreak havoc with long term direction.

It seems as if the Pfizer (PFE) is in for continued rough sliding - witness the collapse of share prices for it and its peer major Pharmaceutical and Biotechnology companies last week after President Obama unveiled his new healthcare initiatives. This comes on top of the less than glowing reception for its proposed $68 billion merger with Wyeth (WYE) resulting in both companies share prices plummeting on the prospects-or lack thereof.

The President has proposed greater rebates to Medicare from Pharmaceutical which will significantly impact profitability for Pfizer (and by extension the incentives for further R&D and new drug development). The administration is also pushing for bio-equivalent biotechnology compounds to lower the costs to the consumer for these generally targeted, expensive compounds (and once again making Pfizer's newly acquired biotechnology companies and compounds far less attractive). Add to this the administration's proposal to make reimportation of drugs far easier (again to supposedly benefit the consumer) and layer on top of that Pfizer's already existing problems of low pipeline productivity, decreased effectiveness of its sales force-and the announced reductions in size, excess manufacturing capacity, bloated administrative expenses and it is easy to conclude that Pfizer could be headed for an even greater disaster.