Why a Pfizer-Wyeth merger is a bad idea

(Fortune) -- You'd think it was 1999 all over again.

Not since then have so many Big Pharma mergers been openly imagined. Uncertainties in the financial markets and declining profit rates are inspiring merger whispers in the drug industry. So far, it's all talk; indeed, a number of drugmaker's shares are suddenly looking undervalued. Mostly, though, the deal speculations are being driven by the erroneous notion that large-scale mergers are a cure-all for Big Pharma's current innovation drought.

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Last week, Bayer's (Charts) shares saw a one-day 5.5% surge based on a rumor that Swiss drugmaker Novartis (Charts) was about to make an offer. The giddy speculation continued this week, when suggestions of another pairing began to make the rounds: Pfizer and Wyeth (Charts, Fortune 500). It originates with Credit Suisse analyst Catherine Arnold, who mused about it in an August 20th research report entitled, "What To Do With Wyeth..."

Since the report's release, Wyeth's shares are up 2% from Monday's opening price of $45.77 to $46.61 by the end of trading Thursday. Over the same period, Pfizer (Charts, Fortune 500) shares are up 3%.

For so many reasons, an acquisition the size of Wyeth (with $20.3 billion in revenues in 2006) would be all wrong for Pfizer. The New York-based colossus is in a bind. After subsuming Warner-Lambert and Pharmacia within the space of two years earlier this decade, Pfizer became the world's largest drugmaker. Pfizer's new size was its chief advantage, but also its Achilles Heel. The company needed to churn out billion-dollar blockbusters out of its pipeline just to add growth to its enormous bottom line.

That hasn't worked out so well lately. Pfizer possesses a slate of future products that can't replace revenues of drugs soon to lose their patent exclusivity. Pfizer's cholesterol-fighting Lipitor - the world's top selling pill, with 2006 revenues of $13.6 billion - could lose patent protection as soon as 2010. Lipitor generated 28% of Pfizer's $48 billion in revenues last year.

Wyeth's fortunes aren't much better. In the aftermath of the company's $21 billion Phen-Fen settlement in the late '90s, Wyeth embarked on a top-to-bottom overhaul of the company's research arm. In addition, Wyeth went headlong into biotech research, developing a number of promising biologic medicines. By early this year, Wyeth was an industry anomaly; it had a diverse pipeline of new discoveries to bring to market.

Then came the setbacks. In late July, the Food and Drug Administration told Wyeth it could not approve Pristiq, a drug for "major depressive disorder" and menopausal symptoms, until the company offered more data to clear up concerns that the drug may cause heart and liver problems. The FDA delivered another blow on August 10th, when it rejected Wyeth's schizophrenia treatment, bifeprunox. Agency officials said Wyeth's data didn't show the drug to be much more effective than placebos. Both Wyeth drugs were projected to be $2 billion-a-year sellers. Wyeth had hoped those drugs could offset huge sales losses the company sustained in 2002, when studies linked its hormone replacement therapy Prempro to higher instances of breast cancer, heart attacks, and other problems.

As if that weren't enough, two of Wyeth's biggest-selling drugs, Effexor (for depression), and Protonix (for heartburn) are expected to lose U.S. patent protection in 2010 and 2011, respectively. In a recent missive to investors, Deutsche Bank analyst Barbara Ryan wrote that the combined commercial potential of Wyeth's pipeline "won't be enough to replenish revenues that will be lost at the end of the decade to generic [competition]."

The Pfizer/Wyeth merger scenario is far-fetched, particularly because Pfizer would inherit another troubled pipeline and more big-sellers whose patents expire in the same concentrated period of 2010 and 2011. "Would the idea behind the merger be that misery loves company?" queries Standard & Poors pharma analyst, Herman Saftlas. "Most mergers in this sector haven't panned out from an earnings growth perspective. But even worse, these two companies are in the same boat."

Pfizer could have an investor revolt on its hands if it does decide to propose a Wyeth acquisition. In recent years, top management has sworn off its appetite for big deals, promising a new focus on targeted acquisitions and alliances with smaller (read: more innovative) drugmakers and biotechs. Last winter, incoming CEO Jeff Kindler promised Pfizer would radically change the way it does business. That departure from the old way included a round of difficult cost cutting and "right-sizing" at the company. So, Pfizer needs to continue it's austerity campaign, and oh yeah in the meantime, conjure up some novel medicines.