A patently expensive insurance policy

A patently expensive insurance policy
Comment E-mail Print Share
First Published: Mon, Jun 16 2008. 11 48 PM IST
Updated: Mon, Jun 16 2008. 11 48 PM IST
Pfizer Inc.’s woes won’t be solved with a voyage to India. The drug giant is rumoured to be eyeing a bid for Ranbaxy Laboratories Ltd, a local generic juggernaut. This looks like a recipe for Delhi belly.
Ranbaxy has already agreed to sell a 50.1% stake to Japanese rival Daiichi Sankyo Co. Ltd for $4.6 billion (Rs19,734 crore), a substantial 31% premium. Pfizer would have to pay considerably more. Moreover, big US pharmaceutical companies aren’t good at selling cut-price generics. They divested most of their generics businesses a decade ago.
The fact this chatter is being taken seriously may show fear at Pfizer’s upcoming clash with cut-price drug makers. Ranbaxy is aggressively challenging the patent protecting Pfizer’s Lipitor. The cholesterol-lowering drug accounts for roughly a quarter of all of Pfizer’s sales and even more of its free cash flow.
Much of this will disappear as soon as a generic version hits the US market. The company already pays out a majority of its cash from operations as dividends. A hit to Lipitor could result in a dividend cut, reducing one of the main attractions of Pfizer’s stock.
So, Ranbaxy’s main appeal to Pfizer would be as an insurance policy against prematurely losing its patent. Unfortunately, Lipitor’s patent is likely to expire in 2010 anyway. This would be a short-lived—and expensive—insurance policy indeed.
Comment E-mail Print Share
First Published: Mon, Jun 16 2008. 11 48 PM IST