Pfizer Nears Giant Drug Deal
JANUARY 24, 2009
By MATTHEW KARNITSCHNIG and SARAH RUBENSTEIN
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Pfizer Inc. is expected to pay between $65 billion and $70 billion to acquire rival Wyeth, people familiar with the matter say, as the drug maker makes a risky effort to shore itself up ahead of huge disruptions in the next few years.
Pfizer plans to pay for about two-thirds of the total cost in cash and use its stock for the remainder, the people say. It has raised about $25 billion in bank financing and will tap its cash reserves for the rest. The per-share price is expected to be about $50 per Wyeth share, nearly a 30% premium over Wyeth's price in trading Thursday, before The Wall Street Journal disclosed news of the talks.
The clock is ticking for Pfizer as it confronts the removal of its cholesterol-drug Lipitor from patent protection in 2011. Lipitor provided $12.7 billion in revenue last year, or about a quarter of the company's overall sales. Pfizer's hope is that Wyeth, which has become the world's third-largest biotechnology company, has enough drugs to fill much of that hole.
Pfizer CEO Jeff Kindler has cut costs and laid off thousands of employees since taking the New York drug giant's helm in the summer of 2006, but analysts and investors consider those cuts insufficient to make up for the pending loss of Lipitor. Mr. Kindler is expected to remain Pfizer's CEO if the deal goes through.
A merger agreement could be reached as early as next week, the people close to the situation say, but the timing remains uncertain and the deal could still fall apart.
Any deal would be a harbinger of change in the pharma business as well as the broader financial markets. Takeovers have come to a virtual halt since the financial crisis deepened in mid-September 2008. Funding a purchase of this size would thus be a tentative sign that some deals can work their way through the clogged financial system.
The market appeared to welcome the deal Friday, with Pfizer shares rising 1.4% to $17.45 and Wyeth shares jumping about 13% to $43.74.
Part of the appeal of Wyeth for Pfizer is that it isn't burdened by debt. Wyeth has $14.17 billion in cash and $11.5 billion debt, according to data provider Capital IQ. That means Pfizer can use the net cash position on Wyeth's balance sheet to help fund the transaction.
Bankers concede that only companies like Pfizer -- with its strong credit rating and cash flow -- can attract such a large financing package. Pfizer has substantial cash reserves of nearly $30 billion, though much of that is overseas and impossible to repatriate without incurring a substantial tax bill. That means the drug maker is likely to borrow a substantial portion of the money it needs to complete the transaction. Pfizer will also have to pay higher funding costs than it is accustomed to.
But Wyeth's existing products and those in its pipeline won't offset the loss in Pfizer's revenue from generic competition to Lipitor and other drugs. Wyeth's late-stage drug pipeline is meager, consisting primarily of existing drugs for which the company is trying to find new uses. Even Prevnar-13, Wyeth's key investigational product, which should be a multibillion-dollar blockbuster, won't be a cure for Pfizer.
Still, given the high profile of the deal and the dearth of other business, a number of banks have been vying to play a role in the deal financing, including Goldman Sachs, Morgan Stanley, Credit Suisse and Barclays PLC, among others.
With American and British banks and other natural buyers of corporate debt in crisis, the market's capacity to absorb new debt is limited. That could make it more difficult for other pharmaceutical companies to pursue deals of their own. The wave of consolidation in the drug sector that many analysts are predicting may be no more than a trickle.
Pfizer is itself the poster child for the argument made by some in the pharmaceutical industry that big mergers stifle research productivity. A new Pfizer-Wyeth could cut 70% of Wyeth's R&D budget within a few years, analysts predict. Pfizer declined to comment.
The deal may pose the largest risk to Wyeth. The company is finally hitting its stride after a decade of setbacks, having quietly reinvented itself as a biotech company. Its valuation has held up over the last year, dropping just 7.5%, compared with a 38% drop in the Standard & Poor's 500 Index. In accepting Pfizer shares, Wyeth would be putting itself in the hands of a company that has struggled to absorb large acquisitions in the past.
Most analysts discount the likelihood that another company will enter the fray and try to snatch Wyeth from Pfizer's clutches. Pfizer is already the biggest drug maker in the world by revenue and has more cash than its rivals. One company with the wherewithal to challenge Pfizer is Johnson & Johnson. But like Wyeth, which makes painkiller Advil, J&J has a large over-the-counter drug business, including Tylenol. Such overlap might make a combination of the two difficult to get past regulators.
Wyeth's attractiveness is still a big turnabout for a company that was in disarray nearly a decade ago. Formerly known as American Home Products, it made everything from food products to home goods like pots and pans.
During the 1990s and the early part of this decade, it became mired in lawsuits and controversies over the safety of its major drugs, including diet drugs that were pulled from the market after being linked to heart-valve damage. In 1999, it allotted $3.75 billion for a class-action settlement over the diet drugs. Those legal costs eventually ballooned to more than $21 billion as new claims emerged and many patients opted out of the settlement and continued to sue the company.
In the intervening years, Wyeth has transformed itself into a leader in vaccines and biotechnology. It co-markets Enbrel, an anti-inflammatory biologic, with Amgen Inc. Wyeth's share of revenue from Enbrel amounted to $2.9 billion in the first nine months of 2008. Sales of Enbrel continue to grow briskly, and because it is a biologic, generic competition isn't on the horizon.
Wyeth also built Prevnar, a childhood vaccine against pneumonia, ear infections and meningitis, into the first vaccine to exceed $1 billion in annual sales. Breaking with industry practice, Wyeth priced Prevnar expensively: It costs about $335 for a four-shot regimen. The tactic was copied by other companies such as Merck & Co., which introduced an expensive cervical-cancer vaccine in 2006.
At the same time, Wyeth's struggles with traditional pills contributed to a falling share price and made the company a cheaper takeover target. For instance, expecting that its blockbuster antidepressant Effexor XR would face generic competition by 2010, Wyeth developed a replacement, called Pristiq, that was derived from Effexor and is the sort of follow-on drug that has led to criticism of major drug makers. The company had trouble winning Food and Drug Administration approval for Pristiq, and since it went on the market in early 2008, sales have been disappointing.
Sales of another blockbuster Wyeth pharmaceutical product, the heartburn remedy Protonix, plunged last year after a generic competitor surprised Wyeth on Christmas Eve 2007 by launching a copycat version in the middle of litigation over Protonix's patent.
Another cloud hanging over Wyeth's stock price has been disappointing data from its experimental Alzheimer's vaccine, which it is co-developing with Ireland's Elan Corp. The vaccine, like Enbrel and Prevnar before it, shows Wyeth's willingness to gamble. Many scientists are skeptical of its efficacy. But, if it does end up working and is approved by the FDA, the payoff could be big.
—Shirley S. Wang and Jeanne Whalen contributed to this article.
Write to Matthew Karnitschnig at matthew.karnitschnig@wsj.com and Sarah Rubenstein at sarah.rubenstein@wsj.com
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