Wyeth Deal's Big, but Pfizer Still Needs a Blockbuster

With its pending acquisition of Wyeth ( WYE) for some $68 billion in cash and stock, Pfizer ( PFE) is looking a bit like the pharmaceutical equivalent of the New York Yankees.

A big-market, wealthy team, the Yankees haven't won a World Series since 2000. In trying to recapture past glory, they have invested heavily in veterans and youngsters alike who frequently failed to live up to expectations.

For Pfizer, instead of a roster filled with aging players with diminishing skills, the drugmaker has an aging pipeline with a roster of former stars that have lost patent protection or will lose exclusivity in the near future. Internal R&D and collaborations haven't produced enough big winners, and Pfizer certainly hasn't been able to match the success it has had with Lipitor.

Lipitor, a cholesterol drug that is the world's top-selling medication, was acquired in the blockbuster acquisition of Warner-Lambert, which just happened to be the same year as the Yankees' last World Series victory. The approaching trouble is that Lipitor loses U.S. patent protection in late 2011, taking out 26% of corporate sales. Lipitor produced $12.4 billion in sales last year, down 2% from 2007.

For several years, generic competitors have been eating into sales of former Pfizer hits such as the blood pressure drug Norvasc, the cancer drug Camptosar, the allergy drug Zyrtec and the antidepressant Zoloft. At the same time, Pfizer has endured disappointments with failed products -- the inhaled insulin Exubera and experimental compounds, most notably the cholesterol drug torcetrapib, come to mind.

What Wyeth brings is a roster mixed with solid performers, untested products, aging drugs nearing patent expiration and assorted role players that will probably be shed. The question is whether Wyeth in the end offers enough to help Pfizer get back to championship form.

Investors didn't appear to have much faith that that would be the case, at least in the early going. Shares of Pfizer fell 10.3% to $15.65, while Wyeth edged down 0.8% to $43.39 after spending much of the session in positive territory.

Standard & Poor's, which gives Pfizer its top AAA rating, placed the company on credit watch for a possible downgrade.

"Pfizer may need to take other actions to mitigate the expected revenue and earnings losses," S&P said. "Given the additional leverage and continuing challenge of medium-term patent expirations on important products, we expect to lower the rating, likely to the 'AA' category, if the company completes the acquisition as planned."

Moody's Investors Service said it was placing Pfizer's Aa1 rating under review for a possible cut to as low as A1.

Morningstar believes the "key to the success of the deal lies in the amount of cost savings Pfizer can achieve." The company has forecast some $4 billion in savings by the end of the third year after the deal closes.

"We believe these cost savings are achievable and should significantly improve the growth potential of Pfizer's earnings," Morningstar says. A bigger Pfizer will reduce the company's "overreliance" on a single drug, the firm adds.

However, the the independent research firm Datamonitor says the merger won't prevent a significant sales decline," at Pfizer. The combined companies would have recorded $70 billion in prescription drug sales last year, but the Datamonitor forecasts sales of $54 billion-plus in 2013.

Datamonitor says Pfizer alone would have faced patent expirations on 38.5% of its 2007 prescription sales through that year. The Pfizer-Wyeth combination's patent loss during the same period is estimated at 34.7%.

"This deal gives Pfizer scale but will not resolve the company's negative pharma sales outlook," said pharmaceutical analyst Simon King.

Although the conventional wisdom on Wall Street is that Pfizer had to do something big, sell-side analysts fill their research reports with assorted caveats covering the risks of financing in a lousy economy to the risks of R&D, especially Wyeth's collaboration on an Alzheimer's disease drug with Elan ( ELN).

Wyeth does have some solid performers that will benefit Pfizer, including the pneumococcal vaccine Prevnar, which produced $2.72 billion in sales last year, and the multiuse antiinflammatory Enbrel, which contributed $2.59 billion in sales outside the U.S. and Canada. Amgen ( AMGN) controls the U.S.-Canada marketing, and Wyeth received $1.21 billion based on its agreement with the biotech company. Enbrel treats rheumatoid arthritis, psoriasis and several other diseases.

The biggest Wyeth product, the Effexor XR antidepressant, produced sales of $3.93 billion. The drug is facing generic competition in the U.S. in about two years. Sales of the heartburn drug Protonix fell by 58% to $806 million last year due to generic competition.

But examine Pfizer's Web site outlining corporate and R&D strategy, and you'll see that the company is buying a lot of products and divisions that it doesn't need or want.

In 2006, Pfizer sold its consumer-products division to Johnson & Johnson ( JNJ), saying it would apply the proceeds to R&D and acquisitions. The division provided $9.1 billion in revenue in 2005.

So why would a soon-to-be-bigger Pfizer be interested in a smaller consumer-products division owned by Wyeth? It probably won't be. Wyeth's consumer-health products, including the pain reliever Advil and Centrum vitamins, provided $2.72 billion in sales last year, down 1% from 2007.

Another piece of Wyeth that will probably be sold is the infant-nutritionals business, which posted a 13% revenue gain in 2008 to $1.63 billion. That market isn't part of Pfizer's strategic plan.

The Pfizer-Wyeth deal may also raise antitrust concerns about their large animal-health businesses, which appear to have at least some overlaps. Wyeth's business produced $1.1 billion in revenue last year, up 4%. Pfizer's animal-care division contributed $2.83 billion, up 13%.

As with any large merger, there are bound to be overlapping products that will require divestiture. Pfizer may have to decide whether to keep its Sutent kidney cancer drug or Wyeth's Torisel. Aside from the integrating of product lines, the deal has a lot of moving parts, including the closing of five plants and the firing this year of 8,000 Pfizer employees.

More cuts will come when the companies are combined. Both have been reducing staff in recent years.

Ultimately, for this deal to succeed Pfizer must not only minimize the distractions of such a large merger, but it also must count on the veteran products to perform well until the rookie R&D compounds are ready for the big leagues.

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