Friday, August 24, 2007

Pfizer + Wyeth = ?

First things first - Thanks to insider for the hilarious picture on the left illustrating the trouble with mergers. As most readers of this blog have already read, there has been increasing talk in the egosphere and elsewhere regarding the potential merger of Pfizer and Wyeth (see here for the posting from Pharmalot). The genesis of this discussion was a note by Credit Suisse analyst Catherine Arnold suggesting that the lack of overlap between the two companies, the Alzhiemer's & other Wyeth pipeline products and the biologics capabilities of Wyeth would be well worth it for the Pfizer pfolks to splurge on.

A couple of semesters ago, Pharmalyst took a course in corporate strategy & the Professor had some interesting insights on why most mergers fail. According to her, most companies tout the cost savings that any proposed merger is likely to generate (by reduction of overlapping functions, facilities etc). However most of these cost savings barely cover the premium that the acquiring company pays. Then there are the merger related costs (integration of systems, severance packages etc). Once you add it all up, most mergers end up destroying value. She had a few interesting case studies to illustrate this (like the merger of Diamler and Chrysler). According to her, the only merger that generates value is the one that has what she called "unique synergies"...above and beyond the usual cost savings.

With that insight, Pharmalyst would like to present some numbers from Feb 2000, when Pfizer acquired Warner Lambert. This merger was has widely been viewed as a success.

Deal Size: $90 billion

Premium Paid: $30.6 billion (34% premium). There was also a break up fee paid to Wyeth (AHP then) of $1.8 billion

Combined market cap of the entity after the merger: $230 billion

Recent market cap of Pfizer: $170 billion (that is some amazing value destroyed over the years..don't forget that this includes Pfizer gobbling up Pharmacia and some other small companies & just one big divestiture of its consumer health business)

Annual Cost Savings Generated by Merger (from 2002): $1.6 billion

As you can see from the figures above the cost savings is hardly the factor that made this merger work. The redeeming factor for this merger was the drug Lipitor. Around the time of the merger, Lipitor had annual sales of around $5 billion. In seven years, this has grown to around $12 to $13 billion (though it is on its way back to 5!). This growth in Lipitor revenues was the unique synergy and the sole thing that justified the $30 billion premium paid.

I haven't had time to google the Pharmacia data but doesn't look like any Pharmacia drugs saw that kind of a spike in revenue (in fact Pfizer probably had similar expectations for the COX-2 franchise but that turned out to be quite the opposite!). Not sure what in Wyeth's current set of products can show the Lipitor kind of growth if Pfizer were to acquire them...unless Pfizer feels there are some gems in the Wyeth pipeline that it could grow dramatically and that the current valuation of Wyeth doesn't reflect those prospects, it is a safe bet that any such merger will destroy value.

1 comment:

Anonymous said...

Also don't forget that WL gave them Lyrica. At the time the market didn't expect much in terms of slaes from this (500M to 1B were the peak sales estimate). This drug too has made it a good deal for them as its prospects were not reflected in the valuation of WL at the time of the acquisition.Another thing you should note is that it was a hostile transaction....hostile deals always work better as there are no good packages for the executives leaving etc and costs are actually cut. Good post in general.