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Jan 26, 2009

Pfizer to Pony Up $68B for Wyeth

  • Amid reports of lower than anticipated fourth quarter earnings and major layoffs, Pfizer confirmed last week’s rumors of a $68 billion Wyeth takeover. Pfizer will pay $50.19 per share in a combination of cash and stock.

    Wyeth’s value has gone up from $38.83 at Thursday’s close, before the rumor mill began to churn, to open today at $45.13.

    Wyeth also reported that it has ended discussions with Crucell for an acquisition, sending the latter’s stock crashing almost 30%.

    Pfizer’s proposed merger with Wyeth dwarfs Roche’s $43.7 billion bid for Genentech. Roche made the offer in July 2008 and still hasn’t secured financing for the deal.

    Pfizer, on the other hand, says that it has received commitments from a consortium of banks for $22.5 billion in debt. This signals some optimism in an otherwise tight credit market. Investors likely see the deal as Pfizer carving out a solid place for itself in the vaccines and biologics market.

    “Within three years,” according to Jeffrey B. Kindler, Pfizer chairman and CEO, “we expect that approximately 30 percent of our revenues will be generated by businesses outside of small molecule pharmaceuticals.”

    Pfizer points out that based on IMS data, the combined company will be number one in terms of biopharmaceutical revenues in the U.S. with an approximately 12% market share, in Europe with an approximately 10% share, in Asia (ex-Japan) with an approximately 7% share, in Japan with a 6% share, and in Latin America with a 6% share.

    The deal is expected to be accretive to Pfizer’s adjusted diluted earnings per share in the second full year after closing. The transaction is anticipated to yield cost savings of approximately $4 billion by the third year after closing. Savings are expected in selling, informational and administrative functions, R&D, and manufacturing.

    “Wyeth has $11 billion in operating costs, which seems to offer a significant opportunity for cost cutting,” notes Jason Napodano, biotech equity analyst at Zacks Equity Research. “This could turn virtually no, or negative, top-line growth into double-digit earnings growth in 2010 and 2011.”

    “At Pfizer’s current valuation,” adds Seamus Fernandez, pharmaceuticals equity research analyst at Leerink Swan, “if Pfizer can achieve combined synergies of $6 billion plus within three to four years, and synergies of $9-10 billion across the combined company by 2015, Pfizer shares could appreciate by 15% despite a significant potential cut in the dividend.”

    Wyeth’s largest selling drugs are Effexor, children’s vaccine Prevnar, and Enbrel. “Wyeth should deliver around $23 billion in sales in 2008, up around 4% from 2007 levels,” Napodano predicts. Additionally, Wyeth plans to seek FDA approval this year for a version of Prevnar that will work against six additional strains of pneumonia.

    Also in development is bapineuzumab in Alzheimer’s. While this drug stands to be a blockbuster, it has been plagued by side effects in clinical studies. Additionally, Pfizer will only own partial rights as bapineuzumab is partnered with Elan.

    “In 2012, no drug will account for more than 10 percent of the combined company’s revenue,” according to Kindler. This marks a major departure from the company’s business model of old, which was based on the revenues generated from a few blockbuster drugs. It is in fact this model that has pushed Pfizer into such a transaction.

    Portfolio star, Lipitor will be off patent and will come up against generic competition in just two years, leaving Pfizer vulnerable to declining sales. Yet many do not believe Wyeth’s portfolio or pipeline will be able to replenish Pfizer’s revenues.

    “Wyeth's patent situation is really no better, with expirations on Effexor, Protonix, and Zosyn all expected in the next few years,” says Napodano. “Our financial model assumes Wyeth's top-line stays roughly flat from 2008 through 2012 at $23-24 billion. Pfizer's top-line is also showing no growth and will remain flat at $49 billion until 2012 when it drops significantly due to the Lipitor patent expirations.

    “By acquiring Wyeth, Pfizer gets bigger and slower in our opinion. In 2010 the combined Pfizer-Wyeth could have $73 billion in worldwide sales. That number may decline to $68 billion in 2013 due to patent losses.”

    During its conference call, Pfizer asserted that the takeover of Wyeth is more about creating a diversified portfolio and less about acquiring one or a few major drugs or about cost-cutting.

    Another prospect to watch is Pfizer’s acquisition of Wyeth’s significant consumer franchise and what it will do with it. In 2006 Pfizer sold its consumer division to Johnson & Johnson. “Closing the deal and then selling off parts of the animal health, consumer, and nutritional business could help Pfizer re-coup some of the deal costs,” points out Napodano.

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