Tuesday, August 21, 2007

Old Medicine in New Bottles

Two excellent posts from the Wall Street Journal’s Health Blog and Pharmalot noted speculation from Credit Suisse on a Pfizer bid for Wyeth (we detail that company's pipeline troubles here).

Catherine Arnold, who wrote the original report, is one of our favorite analysts and anything she writes we take seriously.

But let us put the acquisition in the context of some other big decisions Pfizer needs to make.

Since the simultaneous resignation announcements of Alan Levin and John LaMattina, Pfizer has to soon appoint a new CFO and a new research boss. We’re speculated before here and here about who Pfizer might turn to for R&D. The finance choice could be complicated by what we’re told is the likely retirement of David Shedlarz, Pfizer’s vice chairman as well as Levin’s boss, Pfizer’s former CFO, and Kindler’s one-time rival for the top job. A Shedlarz departure would further upset an investment community utterly uncertain about Pfizer’s direction.

But at this point, Pfizer shouldn’t be worrying about Wall Street (it ain’t as if, with $22 billion in cash and short-term investments on its balance sheet, Pfizer needs to sell stock). Instead, the choices Pfizer makes for the R&D and finance jobs will say a lot about just how much strategic change the company’s CEO and board believe they need to make.

Would, for example, they choose a finance boss who would advocate for a more radical use of Pfizer’s cash – equity investments in several dozens of biotechs, for example, or even a Roche-Genentech like transaction? Or, even more radically, with a splintering of Pfizer into a number of quasi- or indeed completely independent therapeutically focused companies, perhaps majority held by a Pfizer holding organization? Or will the new boss simply placate shareholders short term by continuing to increase the dividend (at 4.9%, already the highest in the industry, says Goldman Sachs) and repurchasing shares?

Now back to Wyeth. As we work on a story about trends in pharmaceutical dealmaking for the September issue of IN VIVO, we consistently hear about the revival of interest in major acquisitions—that the problems of Big Pharma are now so severe that CEOs are accepting meeting requests with investment bankers that, just a few months ago, they’d have ignored.

But such deals are difficult given that the product overlap among companies is more obvious to the FTC than ever. And having to sell the overlapping products is what kills value in these deals.

That’s why biotech acquisitions are so interesting. The product overlap is usually minimal and biotechs deliver biologics capabilities that Big Pharma badly wants. A metric of that desire: the highly competitive auction that ultimately delivered MedImmune to AstraZeneca for $15.6 billion.

Theoretically, Wyeth brings similar biologics capabilities to Pfizer that MedImmune brought to AZ, along with a host of non-overlapping small-molecule drugs.

And yet we remain skeptical that such a deal is either likely or in the best interests of either company’s shareholders. Sans CFO and R&D boss, Pfizer shouldn’t embark on their third gigantic integration effort in less than a decade. Wyeth’s biologics business will do at least as well under Wyeth as it will under Pfizer (let’s remember just how underwhelmingly Pfizer has performed marketing biologics like Exubera and Rebif). Meanwhile, any biologics successes will boost Wyeth’s $22 billion base of revenues far more than Pfizer’s $47 billion. Indeed, Wyeth will resist Pfizer’s blandishments, particularly if an offer comes wrapped in Pfizer’s shares.

And if Pfizer presses its case, as it did with Warner-Lambert and Pharmacia, its own investors could easily rebel: why try to cure a disease, they might reasonably ask, with the same therapy which has consistently failed to work?

1 comment:

Anonymous said...

Rumors of Mr. Shedlarz' retirement have been circulating for a while..How credible do you think was/were your source(s)? Perhaps the opportune moment for him to retire may be once PFE announces M&A deal with Wyeth or Biogen