The Best Thing to Come from Pfizer's $68 Billion Mistake
George Huang, editor, S&A FDA Report
January 30, 2009
On Monday, Pfizer offered $68 billion to buy fellow Big Pharma player Wyeth. If you were thinking Pfizer might be worth a purchase, this should send you sprinting the other way.
I've been keeping an eye on Pfizer for years now, and as longtime Growth Stock Wire readers know, I'm no fan. The company will see 25% of its revenue disappear in three years when Lipitor, which brings in $12 billion annually, loses patent protection. And it has let its pipeline whither over the last decade, so there's nothing to replace its lost revenue.
But I watched the company, figuring Pfizer would be worth a purchase if 1) Its shares got cheap enough to make buying its $26 billion cash hoard worth it... or 2) It used its cash to make a smart acquisition, rebuilding its anemic pipeline with another outfit's research.
At first glance, the Wyeth buyout offer works. One of the deal's benefits is reduced costs. Pfizer expects to fire 20,000 people (15% of the combined work force) over the next few years, shaving $4 billion in operating expenses.
Also, Wyeth is a much better innovator than Pfizer. Biotech drugs account for about 30% of Wyeth's revenue. And because they're so different from "small molecule" pills like Lipitor, biotechs don't face generic competition. So sellers can charge as much as 10 times the price of a typical drug. For example, Wyeth's rheumatoid arthritis treatment, Enbrel, costs roughly $20,000 a year.
Included in Wyeth's biotech portfolio is a formidable vaccine business. Wyeth's Prevnar, an infant vaccine against pneumonia and meningitis, generated $2.7 billion in sales last year. Peak annual sales could eventually top $4 billion. So the Wyeth buyout will immediately make the new Pfizer a major player in vaccines.
But Wyeth is staring down the same challenges as its suitor. Its top seller, the $4 billion anti-depressant Effexor, faces generic competition in about two years. That's going to make it tough to grow revenue. Analysts estimate the combined company will make $55 billion in sales in 2013. That's a 25% decline from their combined revenue today.
And Pfizer is paying way too much. The $68 billion deal values Wyeth at around 14 times operating cash flow. Pfizer and other Big Pharmas are trading below 10 times. I don't see the value in paying such a premium.
Also, Pfizer's management is a value destroyer. It's botched two previous mega-mergers over the last 10 years. In 2000, Pfizer bought Warner-Lambert for over $100 billion. But Pfizer management proceeded to force out key scientists. So it never got much beyond Lipitor. And the $60 billion Pharmacia buyout was an utter failure. The crown jewel in the acquisition, arthritis drug Celebrex, never lived up to expectations.
To top it all off, Pfizer followed our script and cut its dividend by half this year.
So if you're not going to spend your money on Pfizer, where's the best place for it? Well, Wyeth is trading around $44 per share, a 12% discount to the $50.19 offer. I have little doubt the trade will go through. So you should be able to grab some profit as the share price nears the offer price. But I don't think that's worth it, especially when we've got a much more attractive opportunity...
As the Pfizer deal neared, Wyeth withdrew from talks to acquire Crucell (CRXL), a Dutch vaccine maker. Wyeth was reportedly willing to pay around $26. Crucell's shares have tumbled to $18.
So the Pfizer-Wyeth debacle is giving us a shot to own one of the world's leading independent vaccine makers. I believe Crucell will eventually fetch an offer for at least $26 a share. At that level, a buyer would be paying about four times 2009 sales for a profitable biotech. Now, that's a smart acquisition.
Both Novartis and Sanofi-Aventis have expressed interest in Crucell. I bet one of these names will take advantage of the mayhem at Pfizer to scoop up Crucell on the cheap. You should, too.
Good investing,
George Huang
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