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Pfizer Wyeth Merger - Collective Analysis of What Comes Next in Pharma Biotech

The announcement today that Pfizer and Wyeth will, at long last, combine to redraw the boundaries of the pharma/biotech universe have prompted me to suggest a collaboration experiment: since we have so many clever minds here on the CI forum, why not analyze and interpret the "what's next" perspective of the deal, whether it'll go forward at all (in lieu of the capital raising and regulatory hurdles it might face) and the eventual consequences for the players within (and beyond) the healthcare/life-sciences sector?

Knowing there are a great many very knowledgeable and experienced observers and interpreters of change in this sector both paying attention the deal as well as to this forum might make this a good deal easier so I'm hoping people will speak up and opine on what the future holds for this important source of innovation and progress in our modern world.

Looking forward to the discussion, I'm clipping in the intro to today's The Big Money (an offshoot of rundown on it:

It's a done deal. Pfizer will be taking over its smaller rival Wyeth in a deal valued at $68 billion, the Wall Street Journal, Financial Times, and New York Times all report this morning. It is the largest acquisition in the pharma sector since Glaxo Wellcome acquired SmithKline Beecham for $76 billion in 2000, the WSJ writes. Meanwhile, the NYT puts the megadeal into today's perspective, saying it "would not only create a pharmaceutical behemoth but would be a rarity in the current financial tumult: a big acquisition that is not a desperate merger of two banks orchestrated by the government." On Sunday night, Pfizer's board agreed to the Wyeth deal, the NYT reports, citing people in the know. The acquisition calls for the drugmaker to raise $22.5 billion in loans, no small feat in this frozen credit market. According to the FT, Wyeth's strong lineup of vaccines and its biotech businesses were the draws for Pfizer. "And the two companies could save billions of dollars in costs by combining," the newspaper adds.

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'Pharma and Biotech behemoth?' It's interesting that the companies and the analysts are talking up the deal and yet for many of us in the industry, Wyeth was not considered a big pharma or biotech company but very much a niche player.

Let's look at what Wyeth actually have:

- A thriving consumer division
- A portfolio of vaccines (useful to Pfizer for their primary care division)
- HRT/women's health products with problems (do they cause breast cancer with long term use?)
- A weak oncology franchise of marginal products
- An interesting pipeline full of CNS products for Alzheimers, but question marks over whether any will be effective

How many blockbusters do Wyeth have? None bring in over a billion dollars globally.

What's next?

- Probably layoffs for Wyeth and an exodus much like we saw at Pharmacia when few wanted to stay with Pfizer (and with reason)
- Inertia and introversion - mergers are always disruptive

Overall, it's hard to see how this deal benefits Wyeth other than a few golden parachutes for senior management. For Wyeth employees they may gain very little other than increased uncertainty and anxiety. Pfizer gain a few cash cows and an undeveloped pipeline that may bear some fruit in the long rather than short run.

For the future? More major mergers isn't always a good thing as it stifles creativity and innovation.
How will this acquisition be viewed by the White House and Congress, all interested in stimulating the economy and creating NEW jobs?

Pfizer is already slated to lay off some 10,000 of its current employees. Odds are good that some Wyeth employees will also lose their jobs post-merger. How does this acquisition help anybody, other than (possibly) Pfizer share-holders???

How many of the banks involved were on the receiving end of the recent bank-bail-out?

Martha Matteo
I agree wholeheartedly, Martha. Many Wyeth employees may either lose their jobs or choose not to join Pfizer. It's a bit Pharmacia redux, sadly.

If anyone is interested, I posted a blog on it earlier this morning.
The Pharmaceutical Industry is a case study of the limitations and failures of CI and it's ability to guide a company and scan the horizon for threats and market changes.

The pharmaceutical industry has only itself to blame for the looming crisis, of which this merger is a part. The industry has become greedy through high pressure marketing of a handful of "consumer" products such as Viagra, Cialis, and other products that treat discomforts or side effects of our way of life. The executives have sat back for so long and reaped the huge benefits of obscene profits, life is Grand! Then the marketplace changed, and regulations began to be enforced and bribes frowned upon.

The response to changing market needs was to ram down the throats of the public and prescribing professionals with endless expensive commercials, and endless visits by a less than qualified salesforce that numbered over 100,000 at it's peak. That failed and created a backlash resulting in doors being slammed in the face of reps, with subsequent downsizing of the sales force.

Wyeth just had four layoffs, Pfizer is going through them, after the merger the pruning knives will be out again. There will be short term gain, and the new corporation will seek new mergers to benefit from economies of scale, and aggressively look to purchase or invest in new biotech start-ups with innovative products to keep the bloated beast alive.

Is this really the way to manage the pharmaceutical industry, or are we seeing the end of big business trampling around the marketplace and based on a consumer's side effects to the excessive lifestyle of consumption. Or putting it another way, when you have lost your job, lost your house, have no medical coverage do you really need to spend money on Viagra?
I just wrote about this potential merger on my blog a few days back. I believe these are the last throes of the culture of big-for-big's-sake in modern organizations. Most quality strategic analysis of the pharmaceutical sector has revealed many reasons to be skeptical of pharmaceutical mergers. Principally, the giant labs that result from mergers don't appear to be that productive, according to industry watcher Derek Lowe. Also, the FDA shows that despite the creation of behemoths, new drug applications are flat.

So why keep merging? I haven't got the data handy but for a while the thought was that a bigger sales force would lead to more robust sales. If my old (unchecked!) assumptions are still accurate, I believe that relative sales force efficacy was dropping off, since doctors and hospitals were chafing at the thousands of reps spreading an ever-increasing web of chinese food lunches and open bars throughout health centers.

So why keep merging, and what does CI have to do with it?

I believe that CI attempts to deal with the rational, the verifiable, the above-board - potential scenarios of the market's future that can be supported by evidence. These mergers, to put it bluntly, aren't rational. They are part of a culture, the culture of big. Revenues must be grown, through merger or organic growth, but must be grown! That's what shareholders expect! That's what Wall Street expects! That's what the financial TeeVee programs expect! The last thing you can do in such an environment is voluntarily become a smaller organization- to retrench, cut the fat, get a new, workable strategy, and begin a novel approach to a new set of market conditions. Not if it means going from Fortune 28 to Fortune 121! Not if it means going from the inter-continental Gulfstream 5 to the paltry Gulfstream 3!

This is the disconnect between strategic intelligence and leadership. Intelligence practitioners start with the external world, collect the best possible data, and let decisions bubble up from those observations. For many leaders, you start from the top-down - make your decision first, then get data to support the necessary conclusions. The last presidential administration was a great place to see this in action.

As long as we start with the assumption that "the answer is big," it won't matter how many thick binders full of data and analysis cross our desks - we'll be disconnected from the reality of the situation.

For these reasons, 2009 is a good time to start re-examining our mental models. Only then can we design appropriate intelligence functions.
I think you'd agree Eric that, many of the mistakes characterized by assumptions such as those you laid out above are driven by short-term decision-maker incentives (top brass with golden parachutes) that are out of whack with the long-term interests (e.g., shareholders, employees, communities, customers, suppliers... the list goes on) that hired them via the board to be their proxy.

Governance then must be the most important and critical weakness of public companies like these (assuming we're less privy to the privately held, but that they make no better decisions necessarily); my lingering question in the weeks since the Madoff scandal broke has been, is the public securitization of capital obsolete in an era where risk must be dealt with through counter-intuitive instruments rather than more straightforward shared-return techniques where growth itself is the only objectively understood yardstick? Indeed, are the public stock markets little better than macroscopic representations of Ponzi scheme games of musical chairs where the only real loser is the last one to buy in before the music stops? Or is that the very definition of a "bubble" in the first place? If so, then the pendulum swing back to big government may be the only thing that can extract us from our current circumstances.

If growth as the chief goal is past its prime, the question going forward becomes, what goal(s) replace growth as the chief yardstick of performance? Or maybe comparative performance doesn't really matter as much as we thought it did after all?
To address some of the concerns here and certainly those insightful comments of Martha Matteo, let's look at the technologies involved. Pfizer's pharma has been spending a lot of money on drug development but lacks the nano-know how to move into the next Gen of pharma-tech. Nanotechnology is where Wyeth comes in both in literal and figurative terms.

By acquiring the nano Wyeth, Pfizer becomes the one stop shop for drug delivery systems on a mircoscopic scale - certainly worth the cost of the deal.
In my humble opinion we are witnessing the implosion of the pharma industry as we know it today. The environment has changed in such a way that none of the established business models are working in either the development or commercialization of drugs, yet the industries leaders for the most part insist on trying to pull the same old levers they always pulled and that always worked before - including merging. As the industry's crisis deepens we will witness ever more desperate attempts to forestall the inevitable. Pfizer will swallow Wyeth (unless the Feds intervene which they might) only to find that they are in a worse situation 18 months from now because they didn't solve for the real problem - the need for new models for drug development, new models for drug commercialization, and new ways of working with the other sectors of healthcare. The bigger question is whether the healthcare system itself will collapse under the weight of ever increasing costs of care and ever decreasing quality of care in a nation wracked by financial instability. What exactly that collapse will look like is a very interesting question.

Did pharma's CI fail it? Again in my experience, no. The pharma culture became toxic to strategic thinking backed by evidence brought by intelligence. As a senior colleague of mine put it very well -- if you're going to circle the wagons, make sure the guns are pointed out..
Arik, thank you for this "collaboration experiment" because it's an opportunity for me to say to all, I love to collaborate, and my focus will usually start with a quick analyis, on, of the lines of business for the company or companies under discussion. Cheers, Alan

For this merger, if it does happen, some of the combined lines of business:

1 Pfizer AIDS Medication / HIV Drugs

2 Pfizer Allergy Dependence Medication / Drugs

3 Wyeth Allergy Medication & Allergy Sinus Medication / Drugs

4 Pfizer Alzheimer Medication / Drugs

5 Pfizer Arthritis / Arthritis & Osteoarthritis Medication / Drugs

6 Wyeth Asthma & Bronchospasm Medication / Drugs

7 Wyeth Birth Control Pills Manufacturing

8 Pfizer Bladder Medication

9 Pfizer Cancer Drugs / Breast Cancer Drugs

10 Pfizer Cancer Drugs / Colon and Rectum Cancer Drugs

11 Wyeth Cat Drugs / Anesthesia Medication

12 Pfizer Cat Drugs / Ear Mites Medication

13 Pfizer Cat Drugs / Tapeworm Medication

14 Wyeth Cat Vaccine / Feline Vaccine Manufacturing

15 BOTH Cattle Drugs / Bovine Respiratory Disease

16 Wyeth Cattle Drugs / Hormonal Implants For Beef Cattle

17 Wyeth Cattle Drugs / Mastitis Medication

18 Wyeth Cattle Drugs / Parasite & Dewormer Medication

19 BOTH Cattle Vaccine Manufacturing

20 Pfizer Cholesterol / Triglyceride Management Medication / Drugs

21 Wyeth Cold Medication / Drugs

22 Pfizer Cold & Cough & Sinus Medication / Drugs

23 Wyeth Cold & Cough Medication / Drugs

24 Wyeth Cold & Sinus Medication / Drugs

25 Wyeth Confectionary / Cough Drops, Throat & Herb Drops Manufacturing

26 Pfizer Contraceptive High-Dose Progestin Injection Manufacturing

27 Wyeth Cough-Expectorant-Soar Throat-Antitussive Medication / Drugs

28 Wyeth Decongestant Medication & Congestant Medication / Drugs

29 Pfizer Depression Medication / Drugs

30 Pfizer Diabetes Medication / Drugs

31 Wyeth Diet Medication / Drugs

32 Wyeth Dog Drugs / Antibiotic Medication

33 Wyeth Dog Drugs / Pain & Inflammation Medication

34 Pfizer Dog Drugs / Tapeworm Medication

35 BOTH Dog Vaccine / Canine Vaccine Manufacturing

36 Pfizer Drugs and Druggists’ Sundries Merchant Wholesalers

37 Pfizer Epileptic Seizure & Neurological Treatment Medication / Drugs

38 Pfizer Erectile Dysfunction & Impotence Medication / Drugs

39 Pfizer Eye Glaucoma Medication / Drugs

40 Wyeth Fever Medication / Drugs

41 Wyeth Flu & Body Ache Medication / Drugs

42 Wyeth Gastrointestinal Constipation / Bulk-forming Laxative Manufacturing

43 Wyeth Gastrointestinal Constipation / Laxative & Constipation Medication / Drugs

44 Pfizer Growth Hormone Deficiency Medication / Drugs

45 Wyeth Heartburn Medication / Drugs

46 BOTH Hemorrhoid Medication / Drugs

47 Pfizer Horse Drugs / Anesthetic - Local Anesthesia Medication

48 BOTH Horse Drugs / Internal Parasites Medication

49 BOTH Horse Vaccine / Equine Vaccine Manufacturing

50 Wyeth Lip Balm & Lip Moisturizer Manufacturing

51 Pfizer Menstrual Cramps Medication / Drugs

52 Wyeth Migraine Medicine / Drugs

53 Wyeth Nose / Sinus Medication / Drugs

54 Wyeth Pain / Oral Pain Medication / Drugs

55 Pfizer Pain Analgesics / Major Pain Killer Medication / Drugs

56 Wyeth Poultry Vaccine Manufacturing

57 Pfizer Schizophrenia Medication / Drugs

58 Pfizer Sleeping / Sleep Aid Medication / Drugs

59 Pfizer Supplements / Dietary Supplements Manufacturing

60 Pfizer Swine Drugs / Antibiotic Medication

61 Pfizer Swine Drugs / Bacterial Enteritis Medication

62 BOTH Swine Vaccine Manufacturing

63 Pfizer Tobacco Dependence Medication / Drugs

64 Wyeth Transplant Prevent Rejection Medication / Drugs

65 Wyeth Vitamins & Minerals / Calcium & Calcium With Other Minerals Manufacturing

66 Pfizer Vitamins & Minerals / Multivitamins - Adult Multivitamin Manufacturing

67 Wyeth Vitamins & Minerals / Multivitamins - Children's Multivitamin Manufacturing

68 Wyeth Vitamins & Minerals / Vitamin C Manufacturing
I understand the rationale for such mega-mergers. However the more i see such giants, the less convinced i am in the wisdom of combining. There are still millions to be made in finding the cure for cancer, alzheimers, parkinsons and many of the other diseases afflicting an aging population - or lifestyle diseases such as diabetes and obesity. However this becomes a process of diminishing returns - as the science gets harder, competition more intensive and the profit requirements for block-buster drugs grow - just so that such companies justify their size.

In contrast, a smaller company is forced to focus on more niche areas - where the opportunities for new developments abound. Genetic diseases impacting 1000s of people instead of millions offer a route for such bio-tech discoveries. However they won't be made by the Pfizer-Wyeth's of this world as the profits would be too small to justify the R&D effort, unless they targeted 100s of such diseases. This won't happen as that's not the culture. So they focus on the "big-ones" and limit their options.

The saying "the bigger they are, the harder they fall" applies in most walks of life - including pharma-co mergers.
I'm wondering how any of these behemoth mergers are addressing the major strategic issue of the industry - that private American healthcare expenditure is expected to double in the next six or so years, from two trillion to four trillion, as the Baby Boom generation need diabetes treatments, help with failed kidneys, new joints, and more. This is going to put price pressure on the industry unlike anything in its 100 year history.

These mergers appear to have nothing to do with strategy.
Arik, thanks for starting this provocative forum. Here’s my take on the 2 questions you posed at the outset:

What’s next from the perspective of this deal?

Pfizer will gladly cast off redundant GP products that Wyeth brings. This deal is not about scale or about growing their primary care business. Their interest is in Wyeth’s biotech franchise: Prevnar, Enbrel, Refacto, and the moon-shot Bapineuzumab. Wyeth’s biologic products will account for 67% ($9.6 billion) of its portfolio revenue in 2012E, and is growing at a healthy 13% CAGR over the 2007–2012E timeframe. Enbrel and Prevnar together will account for over $7 billion in 2012E, up from c. $5 billion in 2008. Pfizer, which has repeatedly stated over the past 2 years that biotech is a strategic priority, is on track to derive a meager 3% ($705 million) of portfolio revenue from biologics in 2012E, and its sole biotech product, Genotropin, will post a CAGR of -4% over the 2007–2012E forecast horizon. Wyeth’s got what Pfizer needs — not only biotech products and a commercial organization experienced in selling specialist medicines, but world-class protein manufacturing capacity as well, a precious asset in the race to build a biologics franchise.

What’s next from the perspective of players within and beyond the healthcare/life sciences sector?

This one’s tougher. I agree with previous posters that mega mergers are probably not the wave of the future. That said, look for Sanofi to make a major acquisition, probably not BMS unless it’s keen to double down on its Plavix and Avapro losses. It’s hard to imagine the French government being content with a 3rd rate national pharmaceutical company. I also think Roche will get its way with Genentech, if not this year then in 2010. Interestingly, we may see more mid-sized mergers that are focused on a particular strategic asset — therapeutic, geographic, or platform. Celgene’s acquisition of Pharmion, Takeda’s of Millennium, Eisai’s of MGI Pharma. All of those were cancer plays, and make sense given the acquirer’s situation. As for the big boys, as Stephen Paul, EVP Lilly Research Laboratories, suggested in a recent interview, the next transformation in the industry will likely be the evolution from FIPCo (fully integrated pharma company) to FIPNet (fully integrated pharma network). The next major transformative wave will probably be more about partnerships than acquisitions, more about focus and efficiency than scale. Like Lilly’s recent partnerships with Covance or with TPG-Axon and NovoQuest.


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