Pfizer's Purchase of Wyeth Is Puzzling

Includes: PFE, WYE
by: Mark Riddix

Pfizer (NYSE:PFE) has agreed to purchase Wyeth (WYE) for 68 billion dollars in cash and stock. Wyeth is the 12th largest pharmaceutical company whose main strength is in its consumer products division. Some of Wyeth’s best known products are Advil, Chapstick and Robitussin. This move is puzzling because Pfizer sold its own consumer products division to Johnson & Johnson (NYSE:JNJ) in 2006 for 16.6 billion dollars. Pfizer was moving away from diversification back in 2006 and focusing solely on its prescription drug business. Now it looks like Pfizer is abandoning a strategy that it just adopted 3 years ago.

While adding Wyeth will improve cost savings for Pfizer, it still does not address Pfizer’s core problem of a dearth of new drugs in the pipeline. Pfizer will find it difficult to replace the revenue that will be lost from the patent expiration on Lipitor. Lipitor accounts for about 25% of Pfizer’s total revenue and the patent is set to expire in 2010. Patent expirations of Norvasc and Zoloft have hurt Pfizer’s earnings over the past few years. According to an Associated Press story, analysts such as Steve Brozak of WBB Securities believe that the deal still doesn’t solve Pfizer’s long-term problem of not having enough promising drugs in its pipeline. “The question becomes what are they going to do to fill that research gap,” Brozak said.

Investors seemed to disagree with the deal as the stock sank 10% yesterday to $15.65. It seems as if Pfizer may be overpaying for Wyeth. It’s a solid company but they are paying too much for Wyeth in a tough economic environment. Pfizer is paying a 30% premium for Wyeth and taking on 22 billion in debt. To complete the 68 billion dollar deal, Pfizer will pay 33 dollars in cash and issue .985 shares of stock. Pfizer may face a ratings downgrade due to the additional debt levels that the company is adding. Pfizer is also slashing the dividend in half to .64 per share. This punishes the many investors who were attracted to Pfizer’s stock for the consistent dividend increases.

Pfizer’s core competence is as a drugmaker. The acquisition of Wyeth will boost revenue over the next few years but it does not solve the growth issues long term. Pfizer needs to hope that Wyeth’s biologics drugs can reignite Pfizer’s dwindling drug pipeline. If not, Pfizer will remain a company with slowing growth whose dividend now appears to be average at best.

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