Medicine: ‘Pfizer and the drugs market’…

PFIZER & MARKET ACQUISITION

From the desk of MD

THE TASK of the drugs and pharmaceutical industry is to provide relief from ailments, and it usually does so with its medicines. The announcement that Pfizer, the world’s largest drug manufacturer, is bidding for Wyeth, a large US rival, should provide a welcome boost for some. Those bankers and legion of lawyers, for instance, who specialise in merger acquisitions and takeovers, may at last have something constructive to do. Pfizer has offered $68-billion for its market rival, belying the current economic gloom.  The global financial crisis and deepening economic crisis have put the brakes on most deals, other than mergers between crumbling banks, as credit has dried up and confidence vastly diminished.

Pfizer intends to finance the deal with a mixture of its shares which, according to recent data released by the Financial Times, have held up well as markets in general have nosedived. It also intends to release cash from reserves and bank loans as part of acquiring Wyeth. Notably, though, pharmaceutical companies do have stronger capitalising positions than firms in other industries; the P:E (price: earnings ratio), for instance, is a strong indication of how healthy companies are. Drug companies are known for large and reliable cashflows, even during periods of economic gloom and downturn. Nervous bankers should not be too fearful of extending credit lines to Pfizer.

And yet, as the recession takes hold in America, which is by far the most important market for drug conglomerates, growth does appear to be slowing. Even vital drug sales may be hit in a recession if financially squeezed patients who lack insurance and health plans, cut back on their medicines. Pfizer is not insulated from the global recession; it has already announced, too, that it will lay off 10% of its workforce, amounting to several thousand employees, and the closure of five of its 46 factories around the world, in an effort to cut costs by $2 billion by the year 2011.

Any successful takeover of Wyeth, though, would cement Pfizer’s market position as the world’s leading drug manufacturer. Pfizer’s revenue in 2008 was in excess of $48 billion, likely to be over $71 billion if the merger goes ahead. The company clearly reckons that greater scale and capacity is a solution not only in countering slower growth in the industry but also to the particular problems that it faces. Big pharmaceutical companies (“Big pharma”) have long felt the competitive breathing and manoeuvring of generic drug companies: in the next few years this competition and threat will intensify as billions of dollars worth of branded drugs are set to lose patent protection. Generic manufacturers are consolidating and growing, evidenced from the creation of several large firms with global operations, plus marketing and research budgets to match. Generic growth will likely impede the blockbuster medicines that have swollen the profits of the big firms.

Lipitor, for example, a blockbusting cholesterol drug that generates $12 billion in annual revenues, is set to go off patent in 2011. Replacements are not flowing anywhere near the rate needed in plugging the gap; acquiring Wyeth, undoubtedly, would provide some insulation for Pfizer: costs, for instance, would be cut by consolidating research budgets and by reducing the vast overlapping market operations of the two firms.

Pfizer’s acquisition proposals are timely because President Obama’s administration team is likely to restrict drug firms from direct marketing to patients in the future. Health care reforms, which formed an integral part of Mr. Obama’s election promise, could see purchasers of government run health schemes demanding bigger discounts from drug companies.

Wyeth has its own concerns. Its best-selling drug patents are also set to expire within the next 24-months. It does, though, have a cash-generating vaccines business and very credible asset of biotech expertise, an area in which Pfizer is not particularly skilled. Biotech is far less susceptible than traditional medicines to replication by generic drug manufacturers. Wyeth also offers strong consumer brands, such as its lines of vitamin products.

The drugs market faces a potential dichotomy. A consolidation strategy, whilst holding out the prospect of short-term gains, might kick-start a process of counter-offers from other big drug firms if such firms felt that their own economic viability was at stake. Indeed, Pfizer’s offer for Wyeth has created added speculation that Switzerland’s Novartis might counter Pfizer’s original offer. Merck is also expected to enter the ring. Conversely, others suggest that larger corporate drug firms might do better in using their cash reserves in taking-over smaller biotech companies, particularly those with the best pipelines of business. Such a strategy would constitute a longer-term gamble with increased risks but, financially, offers potentially greater reward.

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Attribution(s):

1. Economist, 26 January 2009: “Taking something for it”
2. Financial Times P:E data range, 27 January 2009

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© Mark Dowe 2009: all rights protected

mark.dowe@googlemail.com