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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: Twitter: Dereklowe

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« A Long Tail Indeed | Main | Science and Its Values »

January 27, 2009

Pfizer and the Credit Crunch

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Posted by Derek

You might think that the Pfizer/Wyeth deal means that things are creeping back to normal in the M&A world. But the Wall Street Journal reports that Pfizer is having to pay about 8% for the money it's borrowing, and that the funds are due back in a year. There are also very significant clauses in the deal which make it contingent on Pfizer's bond ratings, etc., and will force the company to shell out if things don't go as planned. There's a 4.5 billion dollar breakup fee, for example, which seems to be about twice the usual contingency.

Meanwhile, Reuters notes that credit default swaps on Pfizer's debt have jumped, reflecting significant uncertainty about whether the whole deal will actually go through. Pfizer's likely to be downgraded even if things go smoothly, so this is going to be expensive from every direction. . .

Comments (42) + TrackBacks (0) | Category: Business and Markets


1. Petros on January 27, 2009 11:17 AM writes...

One report claims that Pfizer's rating will drop from AAA to AA, with one agency, and to the much lower A1 with another

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2. Hap on January 27, 2009 11:23 AM writes...

They'd better be making a lot of money in the short term for this to make any sense, or they ought to be pretty sure that Pfizer can optimize the combined resources. If not, I wonder how much money their stockholders have to be bled for for them to actually start delivering substantive messages to upper management - obviously high pay for crappy performance (paid mostly in stock options at the expense of shareholders) didn't do it, but maybe losing their shirts might make some preferred stockholders think that their friendship with upper management isn't worth working as a Wal-Mart greeter in retirement.

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3. Hot Beverage on January 27, 2009 11:37 AM writes...

This deal should not be allowed to go through. The government will end up picking up the tab for 29,000 workers who will be unemployed for as long as a year.

All so a few executives can get a golden parachute?? Certainly the stock price does not reflect happy times to come.

Shareholders lose----Workers lose---executives win! Or maybe executives lose, but they've shown themselves to 'be doing something'.

People's lives destroyed all for some busy-work!

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4. John Spevacek on January 27, 2009 11:48 AM writes...

It's beginning to remind me of the Dow/Kuwaiti/Rohm & Haas fiasco - still unfolding as of today. Dow was going to do a JV with the Kuwaitis and get $9 billion for assets transfered, and then use that as partial payment for Rohm & Haas ($15 billion total - way too much). But with the price of oil dropping, the Kuwaitis backed out so that now Dow, instead of buying R & H is being sued by them to follow through on the purchase.

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5. lucifer on January 27, 2009 11:56 AM writes...

Who cares about the next year? The MBAs still have a year to rape and pillage the place and write themselves all the bonuses/golden parachutes they can get their grubby hands on.

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6. emjeff on January 27, 2009 12:38 PM writes...

One thing is for sure: the reason that Pfizer is giving for this merger is NOT the real reason they want to do the deal. I don't know what that reason is (probably only a handful of people in Pfizer know), but it has little to do with the purported reasons, which is why , on its face it seems to make so little sense.

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7. MTK on January 27, 2009 12:59 PM writes...

If the deal goes through and if it's such a bad deal, blaming the execs here is too simplistic. They can propose this deal, but ultimately the shareholders have to approve it.

I know nothing about the Board, but if enough, and big enough, shareholders cry foul this won't get done. At least not in it's current form. There are plenty of examples of shareholders flexing their muscles, i.e. GSK executive compensation.

take home message: If you're a PFE shareholder and don't like it, don't just bitch here, inform the BoD.

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8. RB Woodweird on January 27, 2009 1:01 PM writes...

Why are credit default swaps still being allowed anyway? This questionable and unregulated financial tool is one of the reasons the banking system took a steaming pile.

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9. Cellbio on January 27, 2009 1:13 PM writes...

MTK, institutions own more than 69% of Pfe, so the average shareholder's vote is mostly meaningless. These large positions, held by banks and mutual funds, generally don't risk their positions by votes of no confidence in management or strategy. Another example, IMO, of the complete lack of oversight in our corporate world.

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10. Hap on January 27, 2009 1:15 PM writes...

I think part of the problem is that the types of stock concentrate power with a few stockholders - preferred stock vs. nonpreferred means (I thought) that most of the voting power is concentrated in the hands of a few. That was why, for example, Garnier was only given a (powerless) stamp of disapproval and not his head on a plate for his salary and options for bad performance.

Still, it couldn't hurt to tell the Board what you think and vote against it if it's not in your interest. It may not do anything, though.

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11. MTK on January 27, 2009 1:17 PM writes...

Credit default swaps in themselves are fine. They were designed as a risk management tool and when used that way were not a problem.

It was the speculation on them that was the real problem. Speculation that was allowed to form a huge bubble due to their unregulated nature.

It's like all the bad mortgages. The mortgage is not a bad vehicle, it was all the risky mortgages that were bad. We're not outlawing mortgages, are we?

With all the scrutiny that CDS's are under right now, the risk has pretty much been taken out.

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12. Hap on January 27, 2009 1:20 PM writes...

Sorry (again) for the multipost - IE or Corante keeps hanging up and I didn't want to retype.

Did I say how much I hate IE?

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13. MTK on January 27, 2009 1:40 PM writes...


Gotta disagree with you on this one. If it's truly a bad deal for the shareholders than it's a bad deal no matter how much you own.

Once again, look back on the GSK exec compensation dustup and you'll see how shareholders great and small can make a difference. Now Garnier still got a lot of options when he left, but ended up being about a third of what he would have gotten and it was all deferred thanks to the shareholders voting it down.

ExxonMobil faced a shareholder revolt last year, so did Disney and Home Depot five years ago. It can make a difference, especially if it threatens to embarrass the institutional investors.

Power to the people.

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14. Hap on January 27, 2009 1:52 PM writes...

The stock vote is what you have - whether it is effective or not, it is your way of making your displeasure known in a way that can't be mistaken for something else. It's like not buying a product as opposed to simply saying you won't buy it - talk is cheap, and votes are at least slightly less cheap.

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15. ty on January 27, 2009 2:19 PM writes...

Wow, our Derek is famous now. Did Fortune take a quote from this blog (I didn't see it if they did) or did they actually interview you?

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16. Hap on January 27, 2009 3:21 PM writes...

I don't think the breakup fee is ridiculous - I think the Dow/Kuwait deal had damages for breakup capped at $2.5e9, while Huntsman only got $1e9 out of Hexion. Since this is so much larger than those (a factor or 4 bigger than the Dow deal), $4.5e9 doesn't seem disproportionate.

Of course, you could buy some decent-size companies for $4.5e9.

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17. The Pharmacoepidemiologist on January 27, 2009 5:55 PM writes...

I always wondered which pharma would go the way of General Motors, becoming too big to succeed. Now I've got my answer. Back in the day, Bristol Myers Squibb came up with a scheme in which the Pharmaceutical Research Institute would crank out three blockbusters (sales of $1 billion annually) each year. Each year! Guess how far that one went. Sounds like Pfizer has the same idea in mind. Probably would have been a better investment if it had bought CV Therapeutics and some other smaller companies instead.

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18. Hap on January 27, 2009 7:06 PM writes...

Where are they going to get $22.5e9 in a year? That's an awful lot of savings to chalk up quickly - maybe they couldn't structure the loans any other way, but the rapid payback would seem to make management's job (if it is to make a company with better long-term prospects) much more difficult. At minimum, they'll need to issue a whole lot of stock to generate that much money, likely near the bottom of an economic cycle, and with predictable effect for the financials of current stockholders. Alternatively, they could sell off assets, though again, they're probably selling them at the wrong time to get good value from them. If they could have gotten that much money in long-term bonds, why didn't they do it now? (Did they figure that bonds might be easier to acquire later?)

The stringent restrictions and the amount of money needed quickly make this sound like a really bad deal for anyone not getting a golden parachute - if it's a loot-and-shoot deal rather than one to enhance Pfizer's long-term prospects, the financials don't much matter (it seems like a rather questionable use of bailout cash, though I really shouldn't be surprised). I'm hoping someone can explain why this deal doesn't suck in every way (for employees, stockholders, Pfizer, the pharma industry).

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19. milkshake on January 27, 2009 7:43 PM writes...

General Motors? I thought Pfizer operates like Soviet Union under Brezhnev, with management model keen on ignorance, propaganda, group-think and hypocrisy...

It will take them at least a decade to crumble. The last blow will be the US health care reform that curbs the drug prices. The industry will look different from what is it today, and I expect (like in the post-soviet era in the East Europe) it will be lean times for long time. Drug research will likely move back to academia.

What we think as normal in the industry was not normal in 60s and 70s - the pharma companies used to be fairly modest. The fantastic profitability of pharma research attracted all these PowerPoint charlatans steeped in the modern management theory buzzwords; over time they colonized the industry and destroyed the research productivity while the company size (and their own bonuses) kept ever increasing. Bullshit eventually has bad consequences but in pharma it takes decades to show. In the last years of his life Paul Janssen repeatedly predicted that the party will end up in tears, and he was not taken seriously.

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20. Pfizerite on January 27, 2009 7:51 PM writes...

The Wyeth acquisition is a loot and scoot by Pfizer. The acquisition benefits Pfizer senior management and Wyeth shareholders and Wyeth management with golden parachutes. There is no benefit for the Pfizer employee at the bench or calling on doctors. There will be no long term ie. 20 year future for Pfizer or any other large pharma company until pharma learns how to find and develop drugs at a sales replacement rate.

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21. SRC on January 27, 2009 9:00 PM writes...

they colonized the industry

Colonized, infected, what's in a word?

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22. milkshake on January 27, 2009 9:33 PM writes...

for anyone interested there is a good write-up on Janssen's management style: Drug Discovery Today
Volume 13, Issues 7-8, April 2008, Pages 281-284, doi:10.1016/j.drudis.2008.02.008

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23. LNT on January 28, 2009 12:20 AM writes...

Hap, once the Wyeth purchase is completed, they will have access to Wyeth's $16 billion in cash. That's how they will repay the $22 billion one-year loan.

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24. KB on January 28, 2009 3:41 AM writes...

Actually I'm sure I read somehwere that the loans Pfizer are getting are staged. The have to pay back about 2.5 billion in a year, a further couple of billion a year later and then some after a further 5. Curiously, the bulk (about 15 billion I think) is tied up in a long term bond type setup, paid back over something like 25 years. I can't find the link on this one but will post it if I do. So I don't think Pfizer will have to strip out all the cash from Wyeth although no doubt they will rape and pillage it for all it's worth.

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25. Hap on January 28, 2009 7:01 AM writes...

LNT and KB,

That helps some. Thanks.

Now it's just a matter of Pfizer's ability to improve research internally in the merged company - it still could suck, and will for the laid-off people, but it would at least look like it could work as opposed to being simply a management-enrichment scheme. The history isn't so good, but for everything there's a first time. Wouldn't have preferred to test that theory so strongly yet.

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26. AR on January 28, 2009 7:52 AM writes...

There is interesting speculation over on the 'In Vivo Blog' ( behind Pfizer’s reasons for the Wyeth deal. Pfizer would share the wealth on Enbrel and have a shot at partnering with Amgen for denosumab. But the real shocker is the speculation that Pfizer would aquire Amgen!

Who wrote here that growth for the sake of growth is the ideology of cancer?

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27. JSinger on January 28, 2009 9:11 AM writes...

It was the speculation on them that was the real problem. Speculation that was allowed to form a huge bubble due to their unregulated nature.

That's what I'm not following in the Reuters story. Are these CDS's an integral part of the deal funding or uninterested parties betting idly on whether the deal goes through? If the latter, I'd say the market still hasn't been taught a severe enough lesson.

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28. MolecularGeek on January 28, 2009 9:51 AM writes...

In post 19, Milkshake wrote:

General Motors? I thought Pfizer operates like Soviet Union under Brezhnev, with management model keen on ignorance, propaganda, group-think and hypocrisy...

I've held for some time that the pharmaceutical industry makes up one of the last great command economies. Something about the way that someone with a big desk and a summer house in the Hamptons thinks that they can overrule the laws of physics and chemistry because they are inconvenient to some grand scheme. Once, I claimed that I might be committing hyperbole; sadly this doesn't seem to be the case anymore.

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29. MTK on January 28, 2009 10:28 AM writes...



AS I understood it the story said that CDS's which are bought and sold as a hedge against Pfizer defaulting on their debts had gone up in price. It is not integral to this deal.

what this means is that people believe that if this deal goes through there is a greater chance of Pfizer defaulting. That doesn't mean they will just that there's a greater chance.

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30. Don B. on January 28, 2009 10:48 AM writes...

Hap: if yopu think this is the "bottom of the cycle" come back in 5 years.
The Bailout Money will only make things worse.

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31. Pam Leranth on January 28, 2009 11:07 AM writes...

Here is the next thing... After attending a big marketing EU convention designed to bring all the innovators to the table, I spoke with a few firms that are now thinking about moving development to North Africa-- Cairo, especially. So, we are at a tipping point... the current decisions are only dance moves.

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32. Hap on January 28, 2009 11:29 AM writes...

Have they read Egyptian chem journals? Unless you're looking for hydrazine-based heterocycles, you're probably not going to find what you need in there, and if that is representative of state-of-the-art there, well, there may be a problem. There are good Egyptian chemists, but probably not enough to do the kind of research companies want. In addition, the rifts in the Arab world over Hamas and Gaza don't speak well to the area's political stability, and Egypt has already had enough problems in that regard.

I wonder if Rwanda is up for some outsourcing action?

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33. anon on January 28, 2009 11:57 AM writes...

"Have they read Egyptian chem journals? Unless you're looking for hydrazine-based heterocycles, you're probably not going to find what you need in there,"

I have yet to see a decent Indian or Chinese chemist living in India or China (there are some very decent ones over here). This doesn't stop GSK, PFE etc from using them.

Hap: maybe we could find less expensive EXECUTIVES in Africa; we should out-source the part of the compny that doesn't produce!

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34. xfz on January 28, 2009 1:42 PM writes...

"I have yet to see a decent Indian or Chinese chemist living in India or China (there are some very decent ones over here). This doesn't stop GSK, PFE etc from using them."

I am wandering how you get this conclusion? I believe there are a lot of decent chemists in India, at least I know there are a lot in China. Have you realized that more and more papers have been published by Chinese chemists IN CHINA in the top journals like JACS and ACIE? Plus, many scientists trained in USA/Europe have been returning back to China in recent years.

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35. DC on January 28, 2009 6:39 PM writes...


I have observed as well, there has been a major increase in the number of papers coming from Chinese universities/institutions over the past 5-10 years. This is not surprising considering the massive money that the Chinese government has put into science and technology (I believe India will follow suit in the next decade or two).

The surprising thing for was that these recent Chinese papers are written to a very high standard of English. Most non-native speakers trained in college/grad school in the Anglosphere could not be expected to write like that (from my own experience dealing with international students), and this is especially true for the Chinese, who hardly pay any attention to teaching proper English at school.

The mystery was (partially) solved when one Chinese professor told me that he would send his manuscripts to American firms that specialized in editing, and presto, you've got JACS-quality grammar and style!

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36. Pam Leranth on January 28, 2009 6:53 PM writes...

Can you say "Flat, Hot and Crowded"?!!!!

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37. Nick K on January 29, 2009 5:57 AM writes...

Anon (#33): Great comment, but you can bet your bottom dollar that top management is the one field of Pharma which is NEVER going to be outsourced, despite being incompetent and grossly overpaid.

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38. Skeptic on January 29, 2009 3:23 PM writes...

Paul Janssens management style:

"In 1985, his company was the first Western pharmaceutical company to set up a pharmaceutical factory in the People's Republic of China (Xi'an)"


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39. Wyzer on January 29, 2009 6:43 PM writes...

In case you are wondering, many of us here at Wyeth also do not support this. We will be the poor slobs out on the street looking for employment when all things are said & done. During a "depression" type recession to boot. When will this unfair treatment of the American workforce end?

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40. Skeptic on January 29, 2009 7:27 PM writes...

"When will this unfair treatment of the American workforce end?"

MBA: "American, whats an american?"

Wvzer, now what will your response be?

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41. Hap on January 30, 2009 2:09 PM writes...

"When will the unfair treatment of the American workforce end?"

1) When wages here drop below those in countries to which they outsource or 2) when there aren't any jobs left here. (there is also the theoretical 3) when there aren't enough people willing to spend years training for uncertain jobs with no chance to recoup their opportunity costs to yield enough workers for them.) At some point, management will become concerned, because there won't be bonuses or stock payouts if no one has any stock or money. You can sell dirt (just look at the supplement market), but the trustworthiness of pharma with lots of people is such that they probably won't be able to - people will prefer to buy dirt from the supplement makers rather than from drug companies.

I don't think we're being screwed unfairly (as Americans versus other countries or even likely versus other fields). The same songs have been played for other people. It isn't management's problem to think about where their subsequent business will come from or where the money to pay for the infrastructure they require to exist comes from - it'll always be there, and if not, they won't be around for the denouement, anyway. The lack of regulation means that management has the chance to apply these rules with far greater breadth and consequences - their power oversteps the wisdom they have and society's ability to cover the consequences.

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42. Frank on February 3, 2009 6:33 PM writes...

Pfizer's R&D fails to produce, so they have to buy their way out of management failure at stockholher's expense. I had a pretty good profit in Pfizer, until management decided to rape the dividend, borrow, and dilute. How can they be trusted when they are so clever at shareholder's expense? I'll be back in when Pfizer finishes going down -- i.e., after the Wyeth deal is done or off the table, and the dividend gets back above 6%.

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