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Will merger be Pfizer's miracle drug?

Suffering a creative drought, the pharma giant aims to buy its way out of trouble. But rather than buy Wyeth, it might be better off with many smaller acquisitions.

By Alyssa Abkowitz, reporter
January 27, 2009: 12:33 PM ET

(Fortune) -- Wall Street analysts have been urging pharma giant Pfizer to do something big and something soon. So that's what Pfizer did. The company's proposed acquisition of Wyeth in a deal valued at $68 billion is big, in fact the biggest pharma deal in almost a decade. But is it the right thing to fix Pfizer's particular set of problems? The New York City-based company has faced increased scrutiny as the looming expiration of its blockbuster statin drug Lipitor, which brings in about a quarter of Pfizer's revenue, is set to expire in 2011. What's more, the flow of new drugs through the company's pipeline has slowed considerably.

"Investors have rightfully been concerned about the clarity of what happens when Lipitor goes off patent," Pfizer CEO Jeffrey Kindler said during a news conference. The acquisition, he added, "definitively addresses that issue."

The Pfizer-Wyeth (WYE, Fortune 500) combination will bring biotech assets like Enbrel, a biologic treatment for rheumatoid arthritis, to a company that predominately has marketed chemical-based drugs. That's a crucial need for Pfizer (PFE, Fortune 500), whose strength isn't in biotech, an area where the growth is.

The deal is viewed as the first of many potential Big Pharma marriages in an industry that's suffering from high overhead costs and, in some areas, overcapacity. Some pharmaceutical experts said Pfizer was boxed in and had no other options. Others said the acquisition is only a short-term fix to deeper problems within the company.

"This may not be the best strategic move for Pfizer," said Edward Hughes, a professor who teaches pharmaceutical business at Northwestern's Kellogg School of Management. "They've had a long string of acquisitions and they haven't been able to succeed."

Pfizer became the world's largest drug company primarily by buying up competitors, most notably its 2000 merger with Warner-Lambert, which brought the drug Lipitor into the company's fold, and the 2003 purchase of Pharmacia. Hughes says the company's long-term survival depends on its research and this deal won't dramatically improve Pfizer's pipeline potential. In the past, Pfizer has been viewed as more of a drug marketing company while other big outfits, such as Merck (MRK, Fortune 500), have been thought of as more research-based companies.

"I wonder if they would've been better off executing 10 deals for smaller biotech companies," Hughes said. "I'm not so sure this is going to look like a genius move."

Pfizer hasn't had a successful drug emerge from its pipeline in several years. Derek Lowe, a pharmaceutical chemist who writes an industry R&D blog, says Pfizer's drought could be attributed to the company's history of mergers.

"Even a well-run merger acquisition is incredibly disruptive because no one knows who's really in charge, what the new strategy is or what the new procedures are going to be," said Lowe, who has never worked for Pfizer. "It takes a long time for the dust to settle and [Pfizer has] done so many of these things that I don't think the dust has ever really settled."

One part of the deal that might boost Pfizer's shareholder value is Wyeth's consumer business -- which offers up, among other things, ChapStick and Advil. In 2006, Pfizer sold its consumer health care unit that included Nicorette, Listerine and Sudafed to Johnson & Johnson (JNJ, Fortune 500), citing a desire to focus on more profitable prescription drugs. Regaining such a division could help Pfizer; J&J's third quarter was solid in part because its consumer business made up for lagging prescription drug sales.

In a Jan. 23 note, Goldman Sachs analyst Jami Rubin wrote that the Pfizer-Wyeth deal would make sense only if it were accompanied by "a rigorous rationalization of resources and costs..." Pfizer told analysts it expects to reduce its workforce by 10%. The company already announced that it would slash 800 research positions this year, explaining that it was trimming staff in order to focus on the research that had the best chances of reaching the market.

Rubin also noted that Pfizer had several strategic options, including a merger "that would lead to a significant restructuring as a first step to an eventual breakup." Some experts, including Pfizer's former R&D chief Peter Corr, have indicated that's precisely what Big Pharma needs to do: take small, flexible approaches to research, something that's hard to do in an 80,000-person organization. Lowe, the pharmaceutical chemist, believes that if Big Pharma were to break up, there could be better research.

"I would rather have a lot of companies all fighting it out," Lowe said. "It keeps us on our toes and it also ensures that a lot of different ideas and approaches are going to be tried out."

For now, that doesn't look like the path Pfizer, or any large pharmaceutical company, is going to take. To top of page

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