Pfizer seeks boost with £50bn Wyeth deal

US drug company Pfizer's $68bn acquisition of Wyeth will please the City - but is it right for Pfizer?

Last Updated: 31 Aug 2010

Viagra-maker Pfizer has agreed to buy rival Wyeth, in a deal worth $68bn – one of the biggest since the start of the credit crunch. The City seems to think it could spark a series of other deals in the pharmaceutical sector – and with all those bankers and lawyers currently sitting around twiddling their thumbs, this would undoubtedly be a welcome development. But for Pfizer, it’s a risky bet: history has shown that pursuing mega-mergers in this sector isn’t necessarily the best cure for a company’s ills…

Pfizer clearly has to do something: its best-selling cholesterol drug Lipitor, which accounts for about a quarter of its revenues, is due to lose its patent protection in 2011. With generic drug-makers set to flood the market with cheaper alternatives, Pfizer needs to plug the gap in its finances – and it’s hoping that Wyeth’s strengths in vaccines and biotech will do the trick. Combining the two companies should also allow for a number of cost savings (e.g. job cuts), which will boost its bottom line (and with fourth quarter income plunging 90% to $266m, according to its statement today, it clearly needs some help in that regard).

Unlike many other big companies, Pfizer’s in the fortunate position of having plenty of cash in the bank: about $26bn, to be precise. It’s also persuaded the big US banks to lend it another $22.5bn – a pretty impressive feat in the current climate, and it highlights the point that companies with strong cash positions are well-placed to make hay in the downturn.

This deal may lead to others: GlaxoSmithKline boss Andrew Witty suggested recently that if one big company made a move, it could compel others to follow suit. Most analysts agree that the industry needs to consolidate, and the big players clearly do have cash to spend. Indeed, the pharma sector seems to be one of the few places where the City expects to see some M&A activity in the coming months; we’ve no doubt that Witty and his counterparts are getting a lot of calls from under-employed investment bankers at the moment...

But is Pfizer’s approach the right one? Previous mega-mergers in the sector have generally failed to deliver a substantial boost to drug pipelines – which is generally the best way to create long-term shareholder value. Witty’s GSK, by contrast, has opted for a lower-key approach: instead of betting the house on one big deal, it’s hedged its bets with a series of smaller acquisitions (today it's announced a £483m deal for some of Belgian drugmaker UCB's emerging markets portfolio). This might not excite the bankers as much, but it may turn out to be the more prudent approach...

In today's bulletin:

Barclays shows us the money
Pfizer seeks boost with £50bn Wyeth deal
Public sector swells - as Corus axes 2,500 jobs
Leadership the Barack Obama way
Marston's soaks up beer costs

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