Friday, January 23, 2009

Pfizer-Wyeth Thoughts

The rumors are back that Pfizer is negotiating to buy Wyeth, which would create a huge pharmaceutical company.

Pfizer, based in New York, has been negotiating with Madison, New Jersey-based Wyeth for months, one person said. A combination would create a drugmaker with annual sales of more than $70 billion, and best-selling medicines that include Pfizer’s cholesterol pill Lipitor, the world’s top-selling medicine with $12.7 billion in 2007 sales, and Wyeth’s Prevnar vaccine against pneumonia.

Based on similar deals, the figures thrown around would put this deal around $60 billion. It is still speculation, and a few factors could push it higher. There are a few ways to look at this. To begin, I'm a Wyeth shareholder so I already am a believer in the quality of Wyeth. I think for Wyeth, a deal at $60 billion would be a little light. Its not a deal they need to do. They have a nice cash position and a good lineup of products. Pfizer needs this deal a lot more. They have Lipitor expiring and haven't been able to create new earnings outside of acquisitions. It seems their management may be feeling the pressure to do some kind of a deal:

Kindler has been under pressure from investors and analysts to make a major acquisition as Lipitor sales fade in advance of the patent expiration. Kindler’s efforts to reorganize the company by firing more than 15,000 employees, including top management, hasn’t been enough, Samuel Isaly, managing partner at Orbimed Advisors Llc, said in an interview.

“Pfizer is desperate in my opinion -- or should be desperate,” Isaly said. "Jeff Kindler will be terminated if he doesn’t do something soon, so he has really got to move it and we wouldn’t be surprised to see a major move.”

During this period where credit is hard to come by, you might think it would be difficult to finance a deal this big. But if there are any companies that can pull it off right now, it is pharmaceutical companies. They have the most stable earnings and balance sheets right now.

“There are very few companies in the world that are going to get money in this environment, but these companies are going to get it,” Ryan said in a Jan. 20 telephone interview. “When we have conversations in private with these CFOs, I am being told they have access to money.”

Pfizer may have to cut its dividend to finance the acquisition, said Leerink Swann analyst Seamus Fernandez in a note to clients today. The benefit to the share price from the deal would still be worth it for investors, he said.

So we'll see where this goes. The deal could go higher, or the deal could fall apart. If I were Wyeth, I wouldn't rush into anything. They don't need this deal and it should be a little sweeter for shareholders, in my opinion.

Disclosure: Long WYE

Bloomberg Article.

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