Buying time

Will swallowing Wyeth cure Pfizer?

WHEN Jeffrey Kindler took over as the chairman of Pfizer two years ago, many looked forward to a new era at the American pharmaceutical giant. Unlike the firm’s previous bosses, typically selected from the ranks of its technocrats, Mr Kindler was an amiable outsider and a lawyer. Investors hoped that instead of gobbling up rivals in an endless quest for scale, Mr Kindler would instead slim down the company in preparation for the dramatic drop-off in revenue at the edge of a patent “cliff” it is fast approaching. Lipitor, a cholesterol drug that earned Pfizer about $12 billion last year, loses patent protection in America in 2011; by 2013 products accounting for 38% of current sales will be exposed to price competition from generics.

But it seems that Pfizer has tamed the outsider, rather than the other way round. On January 26th Mr Kindler declared that his firm was making one of the industry’s biggest acquisitions ever, buying Wyeth, a middling American rival, for some $68 billion. The deal is to be financed with a mix of cash, shares and short-term bank debt.

Financial markets’ reaction was not kind. Pfizer’s share price fell by roughly a tenth on the news, though it later recovered a bit. Moody’s and Standard & Poor’s, two credit-rating agencies, put the firm on their watch lists for potential downgrades. Mr Kindler did not help his case by saying that financing the purchase would mean a big cut in the firm’s dividend, or by using the deal to bury news of a stunning $2.3 billion charge arising from settlement of a legal investigation into the allegedly improper marketing of a pain reliever.

So why did Mr Kindler take the plunge? One reason, he said, was that he could squeeze out some $4 billion in cost savings from the two firms. Claimed synergies have rarely materialised in past pharmaceutical deals, but this time Pfizer seems to mean business: it plans to shed nearly 20,000 jobs. Another attraction of the deal, Mr Kindler argued, is the chance to fill Pfizer’s flagging distribution channels and weak research pipelines with fresh products. Wyeth sells consumer and animal-health products, which could help diversify Pfizer’s revenue base (though it also suggests that Pfizer erred in selling its well-regarded consumer-products division to Johnson & Johnson, an American rival, two years ago).

This deal is a useful “half step” forward for Pfizer, says Charles Farkas of Bain, a consultancy, but no more. He thinks Wyeth’s assets will buy it some time but will not be enough to replenish the research pipeline or to replace Lipitor—not least because Wyeth faces its own patent cliff. Adding Wyeth’s products to its mix would, by one estimate, reduce the share of Pfizer’s sales exposed to generic competition in 2013 by just a few percentage points.

And that assumes that the deal will work. History provides one reason for scepticism. Michael Rainey of Accenture, a consultancy, who has scrutinised big deals in the industry, reached the damning conclusion that “nine out of ten deals created no value or negative value.” Asked recently about mega-mergers, David Brennan, boss of Britain’s AstraZeneca, scoffed that if big efficiency improvements were really possible, good managers would do them anyway, rather than pursuing mergers.

What about economies of scale in research? In fact there seems to be no connection between size and success. If anything, larding on extra layers of research managers stifles the entrepreneurial spirit that makes nimble biotechnology firms successful. That points to another potential weakness of the deal. Although Pfizer will gain access to novel vaccines and biotechnology, those innovative bits will come wrapped in big-company bureaucracy.

The final reason for concern arises from the vagaries of the financial crisis. Pfizer has obtained some $22.5 billion in bridge financing for this deal from five banks. If its credit rating drops sharply, the banks have the right to revoke the loan—and Wyeth could walk off with a $4.5 billion break-up fee. That is unlikely given Pfizer’s financial strength and solid credit rating, says John Moore of 3i, a private-equity firm.

But what will happen to the deal’s financing if politics enters the fray is less clear. The American banks helping to finance the deal have benefited handsomely from taxpayer bail-outs. What will Mr Kindler say if he is hauled down to Washington, DC, to explain to Congress why he is using billions of dollars borrowed from such banks to implement a deal that, as he insisted this week, will result in the swift sacking of thousands?

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