A Third Mega-Deal Done, Pfizer Still Needs New Drugs

Pfizer (PFE) paid $90 billion for Warner Lambert a decade ago, then added Pharmacia, at a cost of $60 billion, about three years later, and then a year ago completed its $68 billion acquisition of Wyeth. Fee-hungry investment bankers no doubt loved those deals, but investors weren’t much impressed:

Pfizer Stock Chart

It’s not that pharmaceutical mergers don’t make sense. Pfizer will take billions of dollars of costs – and nearly 20,000 employees – out of its latest acquisition, making the combined companies more profitable together than apart. And existing drugs at acquired companies sometimes expand enough to justify hefty premiums paid, or at least come close. Warner Lambert’s Lipitor, bringing in less than $4 billion when the companies agreed to combine, went on to top $12 billion in sales by 2007. Pharmacia’s Celebrex was less of a barn burner. And it’s too early to say how Wyeth’s Prevnar and its foreign-sales rights to Enbrel will perform in coming years.

But doing deals takes its toll on the acquirer. Pfizer now has a mountain of debt to repay.

Pfizer Stock Chart

And all that borrowing to buy Wyeth, of course, forced Pfizer to slash its once-generous dividend.

Pfizer Stock Chart

Pfizer went looking because its crown jewel, Lipitor, is losing patent protection, and Lipitor sales — $11.4 billion last year — could start evaporating soon. A handful of other Pfizer drugs with sales of more than $1 billion a year, including Viagra, are losing patent protection by 2012. Pfizer’s already throwing about $8 billion at R&D each year, with not so much to show for it, so simply giving more money to the guys and gals in the lab probably didn’t seem wise.

Pfizer Stock Chart

The Wyeth deal buys time. It means that, even with big patent expirations and the resulting lost sales, Pfizer’s overall sales will only dip slightly in the near term. Pfizer is projecting revenue of $67-to-$69 billion this year, the first full year of Wyeth sales being included. And for 2012, Pfizer expects sales of $65.2 billion-to-$67.7 billion. Just a little off the top.

Merger charges – all told between $11.5 billion and $13.5 billion – will sap the bottom line through 2012, Pfizer says. By then, perhaps Wyeth’s Prevnar, a vaccine, will be cleared for additional uses and sales will rise. Or maybe Pfizer’s R&D efforts will finally pay off. If not, there’s probably another deal to do.

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