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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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In the Pipeline

« Cheer Up | Main | Like Clockwork »

August 27, 2007

Oh, Come On

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Posted by Derek

I hope that this is still the silly season for merger speculation. Right after the run of dimwitted Novartis-buys-Bayer/Schering rumors, we now have the even more spectacularly slackjawed Pfizer-should-buy-Wyeth ones. I first came across this at Invivoblog, and could hardly believe my eyes.

Wyeth's not a bad company, although they've had their problems over the years. They've put a lot of money into some difficult areas, such as vaccines and Alzheimer's, and I have to give them credit for that. But Pfizer isn't interested in most of these things, because they can't start paying off in time to to sheild them from the Big Lipitor Sales Slaughter in a few years. Pfizer needs big sales, real soon.

But doesn't Pfizer have enough on its plate without going through yet another massive acquisition? And weren't its two previous whoppers designed to get their hands on specific huge-selling drugs? Where's Wyeth's? And isn't Pfizer big enough (and isn't its research productivity bad enough) already? Wouldn't some of the company's biggest shareholders likely throw a rug-biting fit? I could fill the rest of this post with such questions.

Others are already asking them, as it turns out. Here's hoping that this is just investment-bank noise, trying to scare up some action for the fall dealmaking season so that everyone can rake in a good bonus this year. No, you have to go all the way to Peter Rost to find someone who likes this idea - and for all I know, he's probably urging it on in the hopes that it'll bring down the roof on his former company.

Nominations are open for the most idiotic drug company merger combination you can think up. But you have to beat this one to win, and good luck.

Comments (21) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. Pfizerbull on August 27, 2007 10:24 PM writes...

I agree and would be disappointed if Pfizer squandered its cash on a large acquisition of this kind. They are already very profitable with a high return on equity. With the share price where it is they simply need to keep buying their shares back and keep lifting the dividend. With cash on hand and robust cash flow over the next few years they could buy back 30% of the outstanding shares and still have a higher EPS when Lipitor is gone and let the newly released products and current pipeline work its magic.

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2. Peter Rost on August 27, 2007 10:53 PM writes...

Just a humble question to Pfizerbull (what a contradictory name . . .); Exactly what do you think will happen to Pfizer stock when they lose Lipitor, (remember why they needed torcetrapib?), and when they lose another 5-10 billion due to patent expirations? You think Pfizer management will just sit and watch sales drop 20% resulting in stock dropping another 50%? Or you think they will wait and hope for R&D to suddenly do something Pfizer R&D hasn't been able to do for the last decade? Fifteen years from now there will be five major drug companies left. Pfizer will be one of them, because they have the cash. And that's only going to happen one way.

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3. Pfizerbull on August 27, 2007 11:51 PM writes...

My opinion is that Pfizer is bottoming. If it goes lower it only helps the repurchase plan. The Lipitor and other expirations are already "baked" into the current share price. Sales are not as important and earning and return on equity. Pfizer is still incredibly profitable and "if" they use this free cash flow over the next several years to aggressively repurchase stock (up to 30% of outstanding shares) and increase the dividend 10% per year, as Lipitor rolls off patent, Pfizer will be a smaller but much tighter organization and new drugs will have more of an effect on the bottom line. The secret is not increased sales per se, but keeping the ROE high and EPS growth increasing. Pfizer has gotten way too bloated but I can see it trimming down over the next few years as long as management do what is best for shareholders and not themselves (i.e. aggressively repurchase shares, boost dividend 10% per year going forward). IMHO they should not make a large acquisition and enlarge the cake (and thus sales), just make the cake smaller but more profitable per slice.

Disclaimer. I am a shareholder.

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4. Jack Friday on August 28, 2007 1:13 AM writes...

How about AZ and MedImmune?

Idiotic or what?!

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5. Chris Morrison on August 28, 2007 2:19 AM writes...

i don't know that AZ/MEDI was idiotic--expensive, hell yes--but AZ is making the fast moves in large molecules it needs to make to be able to compete in the years to come. PFE should do the same, though i agree that buying WYE or another Big Pharma isn't the way to go (as we point out in the link Derek included).

To get half of Wyeth's lead Alzheimer's program Pfizer could buy Elan. Or they could follow Merck/Roche/Novartis' lead and make a bigger splash in RNAi. But any deal will be pricey: with pharma hurting so much, biotechs have a ton of leverage.

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6. Pfizerbull on August 28, 2007 3:02 AM writes...

I hope Pfizer continues to make smaller (for them) acquisitions like Vicuron to add specific products to the portfolio.

They are definitely using RNAi at Pfizer for target validation like all big pharma and could license specific areas for RNAi therapeutic development like Roche have from Alnylam recently, but RNAi drugs are still not going to give near term results. Better they take the path of big stock buybacks, increasing dividends and strategic acquisitions (aka Vicuron).

While this is not a "merger" as such, the price paid by Roche to Alnylam of 330M for "non-exclusive" rights to work in several RNAi areas is mind boggling to me, not the price, but the price given the agreement is non-exclusive.

My prediction is the next major RNAi deal is going to blow everybody away and finally bring RNAi to the attention of mainstreet as well as Wallstreet.

May I suggest we will see a Billion dollar RNAi deal in the not too distant future.

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7. burt on August 28, 2007 7:54 AM writes...

Pfizerbull, I own LOTS of PFE. I want that stock to do well. Really. But I hope to Zeus they don't buy any more drug companies, for the sake of humanity. PFE clearly has no interest in or talent for R&D. They are a glorified sales and marketing company. This may be OK for shareholders (depending on how they finesse the Lipitor expiration), but it does NOT benefit people with under-served diseases.

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8. Kay on August 28, 2007 8:09 AM writes...

Pfizer is very well positioned because it has a large animal health business and many animal models. If the animal models lead them to poor clinical results, then they can at least rely on the vet health revenues!

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9. Peter Rost on August 28, 2007 9:20 AM writes...

Pfizer is, unfortunately, not well positioned for anything, except to buy and dismantle others. They have no organic growth, they have organic contraction. While I can understand Pfizerbull's suggestion about continuing boosting dividend, this doesn't make them a growth stock. It simply would make them a super bond. They are already a bond - no growth, high dividend (Jim Cramer). And patent expirations are not included in current share price, since share holders expect them to pull a rabbit out of their hat. And so they will have to do that, unless Kindler is going to go down in history as an even worse performing CEO than McKinnell. Kindler doesn't want that. McKinnell was hit by "the patent expiration cliff" and did all he could to stop the bleeding by buying PHA. Kindler isn't going to sit on his hands. Stop dreaming. Big pharma will become the Big Three.

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10. Daveh on August 28, 2007 9:50 AM writes...

Pfizer's Chantix(R) is still under the radar for most, however the word of mouth buzz (It Works!) is growing amoung smokers. They maybe able to counter some of the Lipitor losses better than predicted.

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11. GATC on August 28, 2007 9:55 AM writes...

Are there any examples where a recent megamerger has had any real pay-off (other than funding golden parachutes for top level retirees)? As a casuality of the Glaxo-SmithKline Beecham fiasco I haven't seen much and we are now five years out.

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12. Jimbo on August 28, 2007 10:31 AM writes...

Derek and all,

15 years in the industry have made me a believer in the old saying "where there is smoke, there is fire". If rumors and articles like these keep appearing, Pfizer might be shopping around. One thing that I'm not certain -- would the FTC approve another big Pharma buyout? AFAI remember it took a while to approve the Pharmacia deal.

One other possible target for Pfizer to go after might be a Biopharma -- how about Amgen? Stock is quite low, management has lost credibility and Pfizer can play the White Knight. They've been interested in going biologics for a while - no wonder St.Louis is expanding, I hear. With Amgen they get the know-how and manufacturing capacities plus a decent cashflow (providing they cut the ineffective parts, like small molecules, redundant R&D, admin, sales, etc).

On the other hand -- naah ... deal makes too much sense, so probably ain't gonna happen :-).

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13. burt on August 28, 2007 10:42 AM writes...

"remember it took a while to approve the Pharmacia deal."

The FTC only cares about making sure the resulting company does not constitute a legal monopoly. They looked at the whole business-- Ag, animal health, drugs. They don't care about the fact that PFE utterly destroyed a fine mid-sized Pharma company with a promising pipeline while Fred got his parachute and his chance to go wreck another company (Shering-Plough).

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14. MolecularGeek on August 28, 2007 12:24 PM writes...

To borrow from another industry, this is a classic case of dinosaurs mating. Sperry and Rand and Burroughs and Control Data and their kin all faced their obsolescence in the late 1970s and early 1980s by merging and trying to become bigger and maintain market share through that route. How many of the readers here know of a CDC 205 operating in their employer's machine rooms today?

I will concede that in the case of the seven dwarfs, it was a fundamental technology shift that killed them off. IBM survived, but by completely redesigning their business, and even they nearly didn't make it a couple of times.

My point is that businesses that are faced with financial crisis react in predictable ways. Occasionally you run into an IBM that kicks over the traces and does the smart thing, but mostly they just merge and rely on combining diminishing slices of the market and mythical economies of scale. I'd like to see Pfizer show some sanity and return to the roots of their original success, but that's like asking a horse not to run back into a burning barn.

I'll agree with Derek and say that I am not sure that you can find a worse merger than Pfizer/Wyeth, but I don't think that there IS a possible big 5 pairing that makes sense for increased research productivity, or more NCEs entering the clinic in the long term.

MG

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15. Jose on August 28, 2007 12:31 PM writes...

For my own sanity, I really have to assume that even PFE isn't *that* insane.

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16. Tom Spencer on August 28, 2007 1:36 PM writes...

GalaxoSmithKlein (makers of Nicorette) buys RJR Nabisco or Phillip Morris (in the nicotine delivery bussiness)

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17. wcw on August 30, 2007 12:17 AM writes...

Funny, I expected humor, and got analysis. You kids do know that if you're bored with pharma, a few hundred ducats and a little studying will get you a CFA. Go with it -- it's a fun industry.

Your timing could be better, mind you..

Me, I like the GSK/MO merger a lot. Ideally, they'd just buy the mooted spinoff of Altria's non-US operations. Not only is it the growth market, but it's more digestible and is a clear marketing vector for Nicorette.

Nicotine delivery is nicotine delivery. The idea that smoking it off a leaf or chewing it in a gum are somehow different eludes me.

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18. Petros on August 30, 2007 9:08 AM writes...

For worst possible mergers surely something that involved a horrendous clash of cultures is required (remember Pharmacia & Upjohn)?

Since merging with a Japanese company is inconceivable that requires merging a European major with a brash US company.

Bsyer-Schering + Lilly or Pfizer?

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19. Jimbo on September 1, 2007 10:14 PM writes...

Funny, I expected humor, and got analysis. You kids do know that if you're bored with pharma, a few hundred ducats and a little studying will get you a CFA

Does CFA stand for Cat Fanciers' Association?

;-)

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20. drug-dealer on September 2, 2007 10:27 PM writes...

I understand everyone's intuitive sense that there has to be more consolidation in the industry. But Big Pharma is like a dancehall filled with Shallow Hals and Ugly Bettys. Everyone's unappealing to everyone else. Any acquisition you can name looks like a gamble for PFE.

The only hope for PFE is to continue aggressively pursuing its in-licensing and JV efforts--and cobble something together to fill the Lipitor gap. Kindler has said that the company will rely less on blockbusters in the future. And I think that's where he's hoping his legacy lies--getting PFE over its blockbuster addiction.

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21. Jonadab the Unsightly One on September 26, 2007 10:00 AM writes...

How about UNH and JNJ? I know UNH isn't strictly pharma as such, but it's clearly a related industry, and the merger is funny to think about.

Either that, or Pfizer could buy McDonald's. Heh, heh, heh. Actually that might even make (some limited) financial sense if they could somehow avoid accusations of conflict of interest.

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