March 31, 2009
That question has been asked almost daily by Wall Street and the business media since late 2006, when then-new CEO Jeffrey B. Kindler announced the death of torcetrapib, the company's would-be savior. The No. 1 pharmaceutical company with the best-selling drug in history—and the steepest patent cliff—has come to symbolize the "crisis" of the drug industry and its bankrupt blockbuster model.
Could this drug colossus fail? Just go under, like a glacier into the sea? Or like Lehman Brothers, GM, the state of California...
It's only fair to remember that Kindler, like President Obama, inherited the mess he faces. In a race against time, he has arguably made the right moves: ending the sales-force arms race, re-creating R&D as small business units, abandoning cardiology for oncology. He in-licensed and outsourced, cut back and closed down. "The expression I use here a lot is: 'the spirit of small, the power of scale,'" he told BusinessWeek last October. "It's continuous improvement, but we've made enormous progress."
Still, Kindler couldn't get a break. Exubera became a joke; Chantix, a rare breakthrough from Pfizer's own lab, made news less for its public health benefits than for the bizarre behavior of new users. "You want to know why everyone picks on Pfizer?" asks Decision Resources analyst Michael Latwis. "Because they spend the most money on R&D and have a string of failures to show for it." (Pfizer did succeed with Sutent, approved simultaneously for kidney and gastrointestinal tumor in 2006; it had sales of $850 million in 2008.)
"Pfizer is like a roach motel: drug candidates go into the lab but never come out," wrote an anonymous Pfizer employee, commenting on an article on the Forbes Web site in early January called "The Incredible Shrinking Pfizer." "Sadly, there are great scientists at Pfizer but no leadership."
Pfizer stock has lost 34 percent of its value since Kindler took over, compared with a drop of 20 percent for the Dow Jones Wilshire Pharmaceuticals Index. Scott Richter, a portfolio manager at Fifth Third Asset Management, dumped his Pfizer shares more than a year ago because the R&D wasn't performing. "Cost-cutting can help earnings in the short term, but it's not transformational," Richter says.
Then, on January 26, came the potentially transformational event: Kindler announced that Pfizer was acquiring Wyeth Pharmaceuticals for $68.103 billion.
From Wall Street to Capitol Hill
At the press conference at Pfizer headquarters on Manhattan's East 42nd Street, Kindler hammered home two messages: Pfizer would remain No. 1 and this megamerger would not repeat past mistakes. "We have learned a lot from prior transactions. We are very mindful of the importance of protecting [Wyeth's R&D expertise]." And: "This is not about a single product. It is about creating a broad, diversified portfolio of businesses....And it is just such a perfect fit."
News of the deal—the third largest in pharma history—got immediate reviews from Wall Street all the way to Capitol Hill.
The headlines tell the tale: "Not What the Doctor Ordered" in the Washington Post. "Pfizer: Try, Try Again" in the Hartford Courant. "Wyeth's Deal Big, But Pfizer Still Needs a Blockbuster" on TheStreet.com. "Did Pfizer Just Commit Suicide?" on MotleyFool.com. "Is Jeffrey Kindler Brave or Crazy?" on the Harvard Business School Web site.
Not all were nasty. Analysts who had long promoted a major merger as Pfizer's only option—the firm had more than $27 billion in cash on its balance sheet at year's end—grudgingly approved. "Pfizer is in the most desperate state of anyone in the industry in terms of patent expirations," says Standard & Poor's analyst Herman Saftlas. "We feel that it is in the best interests of Pfizer to do a deal like this in order to shore up the top line."
Investors voiced their enthusiasm for the deal by sending the company's stock down 10 percent.
The next day, at a hastily called investor lunch at the St. Regis, Kindler tried again. "This is not a case of simply taking one, big monolithic company...and then putting another one on top of that," he said. "We will be the leader in just about every single market in which we compete."
The deal played into the intense politics of the economic crisis. The fact that Pfizer was able to raise $22.5 billion from five banks was quickly mistaken as a sign that frozen credit markets were beginning to thaw. Four of the banks had received tax-payer money in the form of TARP funds, so Kindler's announcement that 19,500 employees, or 15 percent of the combined company, would lose their jobs by 2013 stoked populist anger. During its grilling of eight national bank heads in early February, the House Financial Services Committee found the Pfizer deal a convenient example of bailout abuse. Meantime, the Greenlining Institute, a Berkeley, Calif., advocacy group, petitioned Treasury Secretary Timothy Geithner to block the transaction unless Pfizer and Wyeth lower drug prices.
The first major merger to come before the new Obama administration, the deal is attracting other controversy as well. The combined company would be the nation's fourth largest by market value ($162 billion), after Exxon, Wal-Mart, and Procter & Gamble. While the merger poses no apparent antitrust threat, the American Antitrust Institute has asked Attorney General Eric Holder for a "careful and skeptical investigation," arguing that there is "scant reason" to believe the merger would improve R&D, and good cause to think it would make Pfizer's bureaucratic situation worse while enriching company managers and bankers. The letter concludes, "That the merger of Pfizer with Wyeth will benefit consumers is far from a foregone conclusion."
At least the price is right. All companies are selling at prices lower than usual, and Wyeth is no exception, says Chuck Farkas, head of healthcare for Bain & Company. "The 30 percent premium is below where Wyeth traded in '06 and '07," he says. Pfizer plans to bankroll the deal with $22.5 billion in cash, $22.5 billion in debt, and $23 billion in stock. To help pay for it, Pfizer's quarterly dividend of 7 percent will be cut in half, a move that has already sparked shareholder venom. "Many are likely to sell, but that might be a good thing," says Peter Young, president of Young & Partners. "Pfizer would prefer to have new stockholders who invest because they have faith in the new company."
At the moment, such faith requires a willing suspension of disbelief in pharma megamergers.
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