The job of the drug industry is to provide relief from ailments, and it usually does so with its medicines. The news on Monday January 26th that Pfizer, the world’s biggest drugmaker, is bidding for Wyeth, a large American rival, should provide a welcome tonic for some. The legion of lawyers and bankers who specialise in mergers and acquisitions, for example, may at last have something to do. Pfizer is offering $68 billion for its rival, belying the current economic gloom. The financial crisis and recession have put a brake on most deals, other than mergers between crumbling banks, as credit has dried up and confidence has shrivelled.
The giant American drug company will finance the deal with a mixture of its shares, which have held up reasonably well as markets have dived, cash from reserves and bank loans. Pharmaceutical companies are in a happier position than firms in other industries. They are known for large and reliable cashflows, even when economic misery is growing. Otherwise nervous bankers should not be too fearful of extending credit to Pfizer.
And yet, as the recession takes hold in America, which is by far the most important market for drug giants, growth appears to be slowing. Even drug sales may be hit in a recession if financially squeezed patients who lack insurance, or with less comprehensive health plans, cut back on their medicines. Pfizer is not insulated from the economic chill: it says that it will lay off 10% of its workers, several thousand people, and close five of its 46 factories around the world, in an effort to cut costs by $2 billion by 2011.
Nonetheless, taking over Wyeth would cement Pfizer’s position as the world’s leading drugmaker. Pfizer’s revenues in 2008 were just over $48 billion. These would be boosted to over $71 billion in a combination with Wyeth. Pfizer clearly reckons that greater scale is an answer not only to the slower growth in the industry but also to the particular problems that it faces. “Big pharma” has long felt the competitive breath of generic drug companies. In the next couple of years the threat will intensify as billions of dollars worth of branded drugs are set to lose patent protection.
In a year or two, as the world economy starts to return to health, the big firms will have to cope without many of the blockbusters medicines that have traditionally swollen their coffers. In addition, generic manufacturers are consolidating and growing, producing several large firms with global operations, plus marketing and research budgets to match.
The problem is acute for Pfizer. Lipitor, a blockbusting cholesterol drug that provides $12 billion in annual revenues, is set to go off patent in 2011. The pipeline of replacements is not flowing with anything like the rate needed to plug the gap. Getting hold of Wyeth would provide some protection: costs could be cut by bringing together research budgets and by reducing vast overlapping marketing operations of the two firms. This is timely as Barack Obama’ s new administration is likely to restrict drug firms from direct marketing to patients. Other health-care reforms could see buyers for government health schemes demanding bigger discounts from drug companies and even buying more generic drugs.
Wyeth has its own troubles. Its best-selling drug patents are also set to expire in the next year or two. But it does have a cash-generating vaccines business and useful biotech expertise, an area where Pfizer has few products. The latter are handily far less susceptible than traditional medicines to replication by generic drugmakers. Wyeth also has strong consumer brands, such as its vitamin lines, a flourishing business that Pfizer may regret having dropped in 2006.
More consolidation could follow among the big drugmakers. Rumours abound that Pfizer’s approach might flush out a counter-offer from another big drug firm such as Switzerland’s Novartis or Merck, another American company. A consolidation strategy holds out prospects for short-term gains. Others suggest that larger drug firms might do better to use their cash to hoover up smaller biotech companies with the best pipelines, a strategy that would constitute a longer-term gamble but with a potentially greater reward.