Pfizer Ups Ante With Pharmacia Deal

As analysts mull the July announcement that Pfizer Inc. will spend $60 billion in stock to acquire Pharmacia Corp., most agree that more consolidation in the pharmaceuticals sector is inevitable. At the same time, more so than in most industries, merely splashing around cash, or in this case, stock, is no guarantee of success even for blockbuster deals like the acquisition of Pharmacia. “The cost savings from the deal, expected to be in the range of $2 billion to $3 billion, will buy Pfizer more time to restock its pipeline, but just because the combined company will have the largest research budget, doesn’t mean it will be the most productive,” says Viren Mehta of Mehta Partners in New York. The merger would create an industry giant with over $48 billion in revenue and a research budget of more than $7 billion. This outstrips competitors like Merck & Co.’s $2.5 billion budget. The cost savings matter because Pfizer, along with other major pharmaceutical companies, are suffering from a drought of new, high-margin, high-revenue products. “All of the big companies will have to consolidate; they all have pipeline problems,” says Hemant K. Shah, an independent consultant in Warren, N.J. He agrees that while there are no guarantees that increased budgets will lead to breakthroughs in the labs, it will make these advances more likely. Mehta adds that the industry is in a transitional period between what he terms the “old” methods of research and new techniques based on gene engineering and other technologies. As a result, companies have to fund both types of research. “This has created pressure on managements to seek out opportunities for savings, and combining companies is one way to do that,” he says. And it was this pressure that forced Pfizer management to pull the trigger on the deal despite the unwelcoming conditions for m&a, which include plunging stock prices, economic uncertainty, and the corporate accounting scandals. “This isn’t a surprising deal in itself, but the timing was unexpected,” Mehta says. The deal gives Pfizer, the world’s largest drug company before the merger, full rights to one of the most profitable drugs on the market, the arthritis remedy Celebrex. The acquisition of Pharmacia has similarities to Pfizer’s successful hostile bid for Warner-Lambert Co. two years ago. In that case, it paid $115 billion in a transaction that gave it control over the popular cholesterol-lowering drug Lipitor. Despite these two large deals, Pfizer says it will control only a little more than 10% of the global drug market, thus suggesting that antitrust hurdles to the completion of the Pharmacia take-out will not be significant. The deal would increase pressure on rivals to follow suit, however. “It’s just a question of how long management and individual shareholders can take the pain before you see more combinations,” Shah says. He says that Novartis AG and Aventis are two large pharmaceutical companies that have the clout to pursue targets. GlaxoSmithKline PLC and Merck are also potential acquirers. Among the list of targets, Shah points to Bristol-Myers Squibb Co., Schering-Plough Corp., Eli Lilly & Co., and Roche Group. But Mehta cautions that the industry may remain something of a crapshoot for some time. “We would like to think that we are on the way to the day when we can make discoveries that lead to profitable drug releases on a consistent basis, but we’re not there yet,” he states.