Pfizer Inc. (PFE) appears to have the ability, even in today's
choppy credit market, to secure the financing needed for a reported
$60 billion-plus bid for Wyeth (WYE), but it remains less clear
whether that's the best use of Pfizer's well-padded balance
sheet.
Proponents for the deal argue that Wyeth's bigger presence in
high-growth vaccines and biotechnology-style drugs could help
alleviate the mounting pain Pfizer is feeling from generic
competition, especially with the looming 2011 patent expiration of
its blockbuster cholesterol drug Lipitor, which represents a
quarter of the company's annual revenue.
"We really think it does make sense for Pfizer to purchase
Wyeth, to try to get some more growth and be more protected with
the patent cliff coming up," said Russell Croft, portfolio manager
at Croft Leominster Inc. in Baltimore, which owns shares of both
companies.
In addition, the hefty purchase price is not seen hurting
near-term earnings as much as might be suspected, assuming
significant cost cuts result from the deal, such as big cuts to
both companies' sales forces.
Still, Pfizer doesn't have the best track record when it comes
to turning mega-mergers into shareholder gold. The New York company
became the world's largest drug maker by sales through huge
acquisitions of Pharmacia and Warner-Lambert, but its shares have
plunged more than 50% over the past five years. Any deal would be a
decisive test for Chief Executive Jeffrey Kindler - who took the
helm in 2006 - to see if Pfizer can get it right this time.
The Wall Street Journal reported Friday that Pfizer was in talks
to acquire Wyeth, Madison, N.J., in a deal that could be valued at
more than $60 billion, citing people familiar with the matter.
Spokespeople for both companies declined to comment.
Wyeth shares recently rose $3.29, or 8.5%, to $42.12, which
brought its market capitalization up to about $56 billion. Pfizer
shares fell 45 cents, or 2.6%, to $16.76. In the credit default
swap market, where investors bet on the creditworthiness of a
company, the cost of protecting the bonds of Pfizer against losses
rose to 105 basis points Friday compared to 86 basis points at the
close, according to CMA DataVision. This means investors have to
pay $105,000 to protect $10 million of Pfizer's bonds per year for
five years. The cost of protecting the bonds of Wyeth against
losses has also risen, according to CMA, which said investors now
have to pay $70,000 to insure $10 million of the firm's bonds
versus $67,800 Thursday
Pfizer has a lot of cash - about $26 billion as of late
September - so it's in a good position to do deals. Kindler
recently signaled Pfizer would consider deals of all sizes. But
given Wyeth's big market cap, it's likely Pfizer would need to use
a combination of cash, stock and debt to do a deal.
Cowen & Co. analyst Steve Scala estimated Pfizer might use
$15 billion cash, $15 billion debt and $30 billion stock. He
wondered whether such a deal would be good for Wyeth
shareholders.
"With the pharma sector selling at extremely depressed
multiples, we question whether now is the right time to sell,
particularly for only a 20% premium," Scala said. "Wyeth sold in
the mid-to-high $40s as recently as July 2008."
Access To Credit
Though credit markets have been tight, Pfizer could get access
because companies with stronger credit profiles are finding it
easier to raise debt, while those viewed as vulnerable in a
recession and with weaker credit metrics continue to be locked
out.
"Pharmaceuticals is seen as a defensive sector in a recessionary
environment," said Neal Schweitzer, senior vice president in
Moody's Corporate Finance Group. Verizon Wireless' successful
fundraising in December is proof that stingy bankswill still extend
loans to key clients that pose less risk, he said.
Companies will have to pay fairly high interest rates to secure
financing, however. Verizon Wireless' one-year bridge loan pays an
interest rate of 3% above the London interbank offered rate, or
LIBOR. This is higher than the average pricing for loans sold by
U.S. investment-grade companies in 2008, which according to
Dealogic, was around 1.04%.
Also, companies such as Pfizer may find it difficult to secure
financing with the tenure they need. A large chunk of any Pfizer
financing could have one-year terms "because of the log jam in the
credit markets," Schweitzer said. The risk is that the market may
have deteriorated by the time the financing is due for renewal,
forcing companies to look for other funding sources.
Any large acquisition also carries the risk of diluting the
acquirer's earnings. Eli Lilly & Co. (LLY), for instance,
expects its recent $6.5 billion purchase of ImClone Systems to
reduce 2009 per-share earnings by about 30 cents to 35 cents, to a
range of $4 to $4.25.
But Deutsche Bank analyst Barbara Ryan said a Pfizer purchase of
Wyeth might only reduce Pfizer's earnings by about 1% to 2% in
2009, and eventually boost earnings by about 15% in 2012. This
assumes Pfizer would use half stock and half cash to finance such a
deal. Cost savings from a merged entity could help bolster
earnings.
What Wyeth Brings
A purchase of Wyeth would further Pfizer's strategy of
increasing its presence in biotechnology and reducing its reliance
on traditional pharmaceuticals. So-called biologic drugs and
vaccines are seen as less vulnerable to generic competition than
traditional pills. Along with Amgen Inc. (AMGN), Wyeth co-markets
Enbrel, an anti-inflammatory drug that continues to have relatively
strong sales growth, and sells the blockbuster childhood vaccine
Prevnar.
Wyeth Chief Executive Bernard Poussot recently said his goal was
to boost the percentage of Wyeth sales from non-pharmaceutical
products to about 75% in four to five years from about 40% now.
Wyeth - which owns the brands Advil, Robitussin and ChapStick -
also would get Pfizer back into the consumer-healthcare segment,
which could cushion the fluctuations in the prescription-drug
sector. In 2006, Pfizer made an ill-timed sale of its consumer
division to Johnson & Johnson (JNJ), which has since reaped the
benefits.
Also, Wyeth is co-developing experimental Alzheimer's disease
drugs with Elan Corp. (ELN), which could have big commercial
potential.
Wyeth, however, isn't without exposure to traditional
pharmaceuticals and accompanying patent problems. In late 2007,
generic manufacturers began selling copies of its Protonix
heartburn drug before the patent expired, forcing Wyeth to cut
costs. And it's expected to face increasing generic competition for
its blockbuster antidepressant Effexor.
-By Peter Loftus, Dow Jones Newswires; 215-656-8289;
peter.loftus@dowjones.com
(Kate Haywood contributed to this article.)
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