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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