Pharmaceuticals firm Pfizer Inc. knows a thing or two about cures. But it hasn’t found an effective remedy for treating the pain its shareholders have been enduring. The stock trades at 1997 levels, while finding growth in a recession is a challenge. A potential deal with Wyeth, a drugs group half its size, looks like decent therapy.
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It’s not that Wyeth offers a killer pipeline to answer Pfizer’s difficulties in bringing out new blockbuster drugs and the loss of patent protection on its top cholesterol drug Lipitor in two years’ time. But a merger would allow the two groups to substantially reduce costs and more effectively pool their research and development spending.
A 50% reduction in Wyeth’s $3.3 billion (Rs16,236 crore) research and development budget would carry a net present value after taxes of some $11 billion. By itself, that could justify Pfizer paying a premium of up to 20% over Wyeth’s undisturbed share price. Add to that a 15% cut in Wyeth’s remaining $13 billion in annual expenses and there could be another $14 billion of value created through a deal.
Of course, Wyeth’s shareholders might demand a higher premium—or indeed prefer to take their consideration in cash. Pfizer would probably want to pay in stock, but it could find some cash. It does not have as much at hand as it seems— much of it is housed overseas. But even if it had to borrow, as it might if it paid for more than about half of Wyeth in cash, that shouldn’t be a problem.
Paying off any such debt would be a cinch. Not only would the combined group generate prodigious cash flow, Wyeth has businesses that Pfizer might not want to own. Some 5% of its revenues come from animal health products and another 10% from consumer products such as Chapstick and Preparation-H. Selling these, as Pfizer did with its own consumer brands to Johnson and Johnson Services Inc., would help to lubricate a deal. The same kind of logic holds for others in the drug sector and beyond. At a time when economies around the world are slowing and the pressure from governments to reduce health care spending is rising, it is unlikely Pfizer and Wyeth are the only two companies seeing the merits of the two becoming one.