Last August I talked about the actions Big Pharma may take to address its slowing top-line growth and the upcoming slew of major drugs facing patent expiration in the next several years. A “horizontal merger” was one option discussed, and yesterday Pfizer proceeded with that strategy with its $68 billion acquisition of Wyeth. So why did Pfizer pursue this strategy, and will it encourage other Big Pharma players to pursue a similar approach?
One contributing factor to Pfizer’s deal with Wyeth is the company’s impending loss of patent exclusivity for its blockbuster drug Lipitor in 2011. Lipitor had $12 billion in sales last year, amounting to 25% of Pfizer’s total sales. However, Pfizer is also keenly interested in gaining access to Wyeth’s long-established biologics expertise and portfolio (Pfizer did not have critical mass in this area), its promising (albeit risky) experimental Alzheimer’s drug, as well as its vaccines franchise, consumer healthcare business and animal health franchise. The deal broadens Pfizer’s portfolio and provides added flexibility in managing earnings over the next five years.
However, the deal is unlikely to contribute to top-line growth in the near term for several reasons. Wyeth has its own patent expiration issues over the next three years, and large pharma mergers are inherently disruptive, particularly to R&D divisions, which are the lifeblood of these companies. The acquisition premium Pfizer paid (approximately 30% over last week’s price) will require Pfizer to be very aggressive in cost-cutting to make the deal accretive to earnings by year two, and that may exacerbate the organizational disruption. Pfizer announced it was cutting its dividend in half to help finance the acquisition (one of the reasons investors previously held Pfizer shares was its high dividend yield).
Will we see other Big Pharma mergers in the near term? Well, virtually every company is considering the possibility, however, challenges remain for other deals, including pricing, financing, social issues (such as who will run the combined entity), antitrust and expected market reaction. Two of the major players are already tied up in other large transactions: Roche’s bid for the remaining shares of Genentech that it does not already own, and Novartis’s two-step acquisition of a controlling interest in Alcon. It is doubtful that the Pfizer deal materially changes the competitive dynamics in the industry. Other Big Pharma players must consider their own internal capabilities and growth prospects and determine whether it is worth taking on the inherent risks of a large pharma merger in today’s competitive economic environment.
Photo credit: Dan Buczynski