January 28, 2009

Pfizer’s acquisition of Wyeth for $68 million overshadowed two other newsworthy items connected with its business dealings.  Pfizer not only announced that its earnings were down 90 percent as a result of a settlement with the Department of Justice concerning the off-label promotion of Cox-2 painkiller Bextra, which was leading to heart attacks and deaths in patients, but they also announced that it was laying off 19,000 employees.  The layoffs are reported to allow Pfizer to proceed with the Wyeth acquisition.   Pfizer’s explanation for its losses is as follows:

    Fourth quarter 2008 results were impacted by a $2.3 billion pre-tax charge resulting from an agreement in principle with the Office of Michael Sullivan, the United States Attorney for the District of Massachusetts, to resolve previously disclosed investigations regarding allegations of past off-label promotional practices concerning Bextra, as well as other investigations.
    … [there was also an] after-tax charge of $640 million resulting from the agreement in principle to resolve certain litigation involving the Company’s non-steroidal anti-inflammatory (NSAID) pain medicines in third-quarter 2008.

Pfizer ended up settling both suits with the states’ attorney general offices for more than double the amount it had originally budgeted.  The settlements are about half what Pfizer paid out to resolve the Vioxx Cox-2 cases. 

In addition to the layoffs, Pfizer cut its dividend payments in half to 16 cents a share to raise the $68 million it needs to complete the acquisition.  Not surprisingly, Pfizer’s tactics resulted in its stock price dropping after the news of their upcoming purchase of Wyeth reached the public.  Wyeth holders may be experiencing what can be described as a sweetheart deal where Pfizer holders are waking up this morning with a hangover.

Pfizer CEO Jeff Kindler acknowledged the fact the past acquisitions have not always produced the intended results, however, Kindler is adamant that the Wyeth transaction will not follow the past trend of deals failing to live up to expectations.

It will take skilled management to turn two operations with differing corporate cultures worth close to $70 million dollars into one cohesive outfit.  The acquisition may signal that Kindler finds the task of integrating Wyeth in to a larger Pfizer less challenging than turning around Pfizer as it existed.

Both Pfizer and Wyeth had recent problems with some of its products.  Pfizer’s patent cliff and loss was highly publicized.  Wyeth will lose Effexor in 2010 and Protonix in 2011.  Since the new company has a void to fill from the loss of these goods, any replacements that produce sales of the $300 – $500 million typical of smaller scale drug revenues won’t be sufficient to sustain the financial health of the new company.  In this sense, the new company has limited its options.

Wyeth’s pack with Elan for bapineuzumab, which is an Alzheimer’s drug, may determine whether Pfizer’s acquisition will be seen as a success.  The upside for bapineuzumab is very large, but so is the risk.

Wyeth carries with it a couple of other potential liabilities.  Lawsuits involving diet drugs Redux and Pondimin have caused Wyeth to set up a $21.1 billion litigation reserve.  Wyeth has won most of its Premarin/Prempro breast cancer cases; however, they are still contesting close to 10,000 suits.

Wyeth’s most profitable drug is Enbrel.  When a reporter asked Wyeth CEO Bernard Poussot about this asset, Poussot verified that the rights to the drug will go back to its partner Amgen in 2012 for the U.S. territories.

Regarding the possibility of a Pfizer acquisition of Wyeth, Fortune wrote 18 months ago:

    The Pfizer/Wyeth merger scenario is far fetched, particularly because Pfizer would inherit another troubled pipeline and more big sellers whose patents expire in the same concentrated period of 2010 and 2011.  “Would the idea behind the merger be that misery loves company?” queries Standard & Poor’s pharma analyst, Herman Saftlas.  “Most mergers in this sector haven’t panned out from an earnings growth perspective.  But even worse, these two companies are in the same boat.

Pfizer could have an investor revolt on its hands if it does decide to propose a Wyeth acquisition.

With the recession leaving no prisoners, changes at the FDA and a Democrat in the White House, the changes occurring at Pfizer are undoubtedly the first of many changes that are likely to occur in the pharmaceutical industry in the coming days.

Published November 17, 2011 by