Ain’t consolidation grand?
January 26, 2009 – 11:32 am by Joshua SlatkoBack in February of 2007, I wrote an article in Med Ad News about the history and potential drawbacks of pharmaceutical megamergers (“For richer or poorer”). This past weekend brought the latest chapter in that saga, with the board of Wyeth accepting a $68 billion cash/stock acquisition offer from Pfizer. The purchase of Wyeth would be Pfizer’s third acquisition of a top-25 pharma company in the last nine years (following Warner-Lambert in 2000 and Pharmacia in 2003), and the biggest of the three – in fact, the largest acquisition of any kind since the AT&T – Bellsouth merger in 2006.
Pfizer and Wyeth’s joint press release announcing the impending acquisition is filled with the usual heady words about synergy, efficiency, and global reach. Not mentioned in the release (but most certainly mentioned in the New York Times article) was a very interesting point – that Pfizer has agreed to pay a spectacular breakup fee of $4.5 billion if the deal should fall through under certain circumstances, such as a downgrading of the company’s credit that would disrupt financing.
The New York Times authors suggest that this represents a nod towards the state of the economy and bank financing at the moment. But Pfizer has had no trouble finding financing so far, with Goldman Sachs, Citigroup, Bank of America, and JPMorgan Chase all lined up to help out. One suspects, therefore, that Pfizer’s $4.5 billion promise represents exactly what it appears to represent to those of us less schooled in the ways of high finance: a company that has gotten to the point of gambling with the milk money just to keep afloat.
Pfizer’s old friend Peter Rost agrees. “Jeff Kindler needs to continue to buy every pharma company in the business, to fuel the stock markets expectations of continued growth,” Mr. Rost writes in his own blog. “The day he stops he is out of a job … After all, all Jeff needs to do is to continue to buy time, make sure Pfizer doesn’t sink. He’s not hunting Wyeth to build a great new empire. He’s doing it to stay afloat when he loses 25% of his sales when Lipitor goes down the tube. And when that happens, he’ll go out and shop for another big company. Maybe Glaxo.”
In their joint press release, Pfizer and Wyeth’s leaders point out that, “The new company will have more resources to invest in research and development than any other biopharmaceutical company and access to all leading scientific technology platforms, including vaccines, small and large molecules, nutritionals, and consumer products.” No doubt. But there is another side to the story. In an interview for that February 2007 Med Ad News article, Dr. Patricia Danzon, a Wharton professor who has studied pharmaceutical mergers, told me that the promise of increased research and development productivity in pharma megamergers has been checked significantly by the difficulty of coordinating larger and larger research and development organizations. “The benefits of size and scale seem to be offset by the difficulty of managing and motivating these very large research teams,” she said. “The idea of economies of scale in research and development has not panned out.”
So what does the future hold for Pfizer? I have no idea. But based on past history and at least some present projections, it’s a pretty good bet what the future holds for many Wyeth employees, both in science and marketing: unemployment. According to one analyst quoted on Bloomberg.com, Pfizer would need to cut 70% of Wyeth’s research, marketing, and administrative costs to produce growth once Lipitor’s patent expires in 2011. The company is already getting a head start; Bloomberg is reporting plans to cut 15% of the newly-merged entity’s headcount and close five factories. Small wonder that employees of both companies are feeling nervous – and even a little rebellious.
