Pfizer aims to acquire rival Wyeth in a proposed deal valued at approximately $68 billion, broadening Pfizer's leadership position in the market by creating a drug powerhouse with combined sales of more than $71 billion, based on 2008 revenues.

The companies announced the acquisition Jan. 26 after merger speculation intensified Jan. 23 (¹ Also see "Pfizer & Wyeth: Is Mega Merger A Strategic Move Or Desperate Play?" - Pink Sheet, 26 January, 2009., p. 3).

With the patent expiration of Lipitor approaching in 2011, Pfizer had few avenues to take to address the looming revenue loss of more than $12 billion. Through acquisitions, Pfizer had grown into a goliath, but one that was about to take a lethal blow. With other patent expirations following on the heels of Lipitor, investors were pushing Pfizer to take drastic measures. Without an acquisition, Pfizer was on track to lose 70 percent of its $48.6 billion in 2007 revenues by 2015.

Pfizer Builds A Levee, But How Strong Will It Be?

With Wyeth, Pfizer gains a levee to buffer the encroaching storm. The deal could set the stage for more industry consolidation to follow as other big pharmas seek to weather their own patent challenges.

But whether a mega-merger will solve Pfizer's problems remains to be seen. The addition of Wyeth doesn't position Pfizer for near-term growth, but rather will allow the company to maintain its 2008 revenues and earnings-per-share levels through 2012. The company is forecasting $70 billion in combined revenues in 2012, although Wall Street's consensus estimates have been about $4 billion lower.

With that in mind, investors will have to keep an eye on the horizon toward the long-term.

"We're obviously very focused on here and now and 2012, but this is a very long-term business, and we believe this deal positions us extremely well for long-term shareholder value creation," CEO Jeff Kindler said during a same-day conference call.

Pfizer To Become Top-Tier Biotech

With Wyeth's portfolio of biologics, vaccines and consumer products, Pfizer's dependence on primary care, an increasingly challenging commercial opportunity, is alleviated. The merger will also reduce the company's dependence on any single product; no one drug will account for more than 10 percent of the combined company's 2012 revenues, whereas today, Lipitor accounts for nearly 25 percent of Pfizer's sales.

Today, 75 percent of Pfizer's business is in primary care, with 27 percent of that coming from the cardiovascular disease area. By 2012, with the addition of Wyeth, primary care is expected to represent 55 percent of the business, only 5 percent of which will be in cardiovascular.

Specialty care, including oncology, infectious disease and inflammation, currently accounts for 17 percent of Pfizer's business, but will grow to 30 percent in 2012, the firm predicted.

Pfizer will remain the world's leader in primary care following the acquisition, but with the addition of products like Wyeth's pneumococcal vaccine Prevnar , the rheumatoid arthritis therapy Enbrel and cancer treatment Torisel , will grow to become the number two player in specialty care, from number 10 currently. Pfizer will become a leader in vaccines, an area it has sought entry.

Enbrel, however, is already facing competition from newer drugs like Abbott's Humira , and is not thought to be a long-term growth driver for Wyeth. The company retains North American co-marketing rights with Amgen only through 2012, at which point it returns rights and maintains a royalty sharing arrangement for three years.

However, during a press conference Jan. 26 Wyeth CEO Bernard Poussot noted, "We believe that in [rheumatoid arthritis and psoriasis] the potential remains in the range of $10 billion between now and 2012, so that is not insignificant."

While Pfizer announced an initiative to position the firm as a leading biotech company with the opening of a Biotherapeutics & Bioinnovation Center in San Francisco last year, the company has fallen behind many of its smaller rivals in the biotech arena. Its late-stage biologics pipeline includes a JAK3 inhibitor for rheumatoid arthritis, an IGF-1R inhibitor for cancer and a nerve growth factor blocker for pain.

A Chance To Correct A Consumer Mistake

The deal also diversifies Pfizer with nutritionals and consumer health products like the pain killer Advil , Centrum vitamins, Chapstick lip protection and Caltrate for osteoporosis, among others. Pfizer sold its own consumer health business to Johnson & Johnson in 2006, but initial speculation that the company might pursue a sale or spin-out of the Wyeth business now seems less likely.

In initial comments at least, management seemed willing to admit the sale of its consumer health business was a misstep, one it may be looking to correct.

"A decision was made at the time based on the view that prevailed at that time," Kindler said of Pfizer's decision to sell its consumer business. "Where we are today is, I think this is a terrific business and one that is very complementary with our portfolio." Wyeth's consumer healthcare and nutritionals business generated $2.72 billion in sales last year, while the business Pfizer sold to J&J produced revenues of $3.9 billion.

Pfizer Finds Funding In Tight Credit Markets

Under the terms of the stock and cash transaction, each Wyeth share will be converted to $33 cash and 0.985 of a share of Pfizer common stock. Based on the $17.45 closing price of Pfizer on Jan. 23, the stock component of the deal is valued at $17.19 per share, representing a total value of $50.19 for Wyeth shareholders.

The offer represents a 15 percent premium over Wyeth's closing price of $43.74 on Jan. 23, boosted by merger speculation, and a 31.8 percent premium over the closing price on Jan. 22.

Once the deal closes, current Pfizer shareholders will own approximately 84 percent of the company and Wyeth shareholders about 16 percent.

The transaction will be financed through a combination of $22.5 billion in cash, $22.5 billion in debt and $23 billion in stock. Pfizer has cobbled together a consortium of five banks to provide the debt. In the current economic climate, with the tight credit markets, initial news of the deal and Pfizer's ability to gain financing briefly rallied Wall Street.

But while banks may be willing to shell out for Pfizer, given its stellar cash position (the company will have about $25 billion in cash and investments after closing the acquisition) and strong credit rating, the financing arrangement doesn't necessarily mean credit is flowing again.

Even Pfizer agreed to pay an interest rate in the range of 7 percent to 9 percent to secure the loan. The loan is also contingent upon Pfizer maintaining certain credit ratings upon closing, including unsecured long-term obligations of A-2 with stable or better outlook; a commercial paper credit rating of at least P-1; a long-term issuer credit rating of at least A and a short-term issuer credit rating of at least A-1. Credit-rating provisions are unusual in loan agreements, according to Moody's Senior VP Michael Levesque, although he believes Pfizer is not a big financial risk.

In connection with the announcement, Pfizer said it will cut its quarterly dividend, a prized payout in the eyes of investors, in half to $0.16 per share beginning with the dividend paid in the second quarter. The cut will help finance the transaction, Chief Financial Officer Frank D'Amelio said.

$4 Billion In Savings; 15 Percent Workforce Cut

Cost cuts are a big rationale for the deal, though Pfizer's forecast for cost savings was lower than some analysts had anticipated. The transaction is expected to yield savings of approximately $4 billion, stemming from selling, information and administrative functions, R&D and manufacturing, to be realized by the third year after closing.

The cost cuts will come on top of ongoing rationalization at the companies, including the $400 million in savings achieved at Wyeth, and $2.8 billion in savings achieved by Pfizer - both by the end of 2008 - and in addition to a new $2 billion savings program announced by Pfizer in their earnings release the same day.

Pfizer expects to reduce the combined companies' global workforce of about 130,000 (roughly 50,000 at Wyeth and 80,000 at Pfizer) by 15 percent. That includes a 10 percent reduction in Pfizer's workforce associated with its new cost-cutting initiative.

Poussot will remain with the company through the transition, but did not indicate any longer-term commitment to stay with the firm.

The news sparked a sell-off of Pfizer shares, with the stock closing down 15.3 percent at 14.58 on Jan. 30 from its Jan. 22 closing. That could be attributed to the dividend cut as well as the acquisition itself. Wyeth shares saw little fluctuation after the market speculation started, closing Jan. 30 at 42.97.

"Pfizer has not stood at the podium per se talking about dividend risk, but it seemed increasingly evident that a dividend [cut] would occur if a big acquisition happened, and not all shareholders may have appreciated this," Sanford Bernstein analyst Tim Anderson said in a Jan. 26 research note.

News of the deal may not exactly excite investors given the red tape and bureaucracy that come with mega mergers amid a changing industry focused increasingly on faster R&D engines and personalized medicine.

"We see Pfizer shares entering a transition with yield focused investors exiting the stock and value and growth investors revisiting the stick," Credit Suisse analyst Catherine Arnold said in a Jan. 26 research note.

Pfizer has faced issues in the past with mega-acquisitions, notably its merger with Pharmacia in 2003, which ultimately was viewed as a barrier to growth by some investors. That transaction resulted in 13 percent cuts to the combined companies' expenses, according to UBS Investment Research.

Over the last two years, Pfizer has implemented additional cost-cutting initiatives that trim much of the scale the firm acquired through its acquisition of Pharmacia (² [A#00690060013], p. 18).

For Wyeth, the deal marks the end of a big pharma, one of the first to implement a biotechnology strategy. It is a company with a long history, dating back to 1860, when brothers John and Frank Wyeth opened a retail drug store in Philadelphia.

The company was known for years as American Home Products until 2002, when the company changed its name back to Wyeth to reflect its evolution from a diversified holding company to a global pharmaceutical firm.

The deal is expected to close in late third quarter/early fourth quarter.

- Jessica Merrill (j.merrill@elsevier.com)

A Goliath Grows: Pfizer To Buy Wyeth For $68 Billion

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