Pfizer to buy Wyeth for $68 billion
Cash-and-stock deal will keep Pfizer the No. 1 drugmaker. Company announces sharp drop in profit.
The deal, the industry's largest since Glaxo Wellcome paid $76 billion for SmithKline Beecham in 2000, comes as major players in the pharmaceutical industry struggle to find new products to keep their revenue stream flush against an increasing wave of generic rivals.|
Pfizer and Wyeth are facing a problem which is systemic and not isolated to their industry. Each expects revenue to fall in the near future as some of their largest-selling drugs lose patent protection. Putting the two companies together will allow them to fire tens of thousand of people and cut other overlapping costs. The firms are nearly identical, which makes expense savings certain.
Pfizer Inc. is in talks to acquire rival drug maker Wyeth in a deal that could Cash-and-stock deal will keep Pfizer the No. 1 drugmaker. Company announces sharp drop in profit.
By Aaron Smith, CNNMoney.com staff writer
Last Updated: January 26, 2009: 8:01 AM ET
NEW YORK (CNNMoney.com) -- Pfizer announced Monday that it has signed a deal to acquire the smaller drugmaker Wyeth for $68 billion.
New York-based Pfizer, already the world's leading drugmaker, becomes even larger following the cash-and-stock deal with Wyeth, based in Madison, N.J.
The deal values Wyeth shares at $50.19 each, a nearly 15% premium to Friday's closing price. Pfizer agreed to pay $33 in cash and 0.985 share in Pfizer stock for each Wyeth share.
Pfizer said the deal would be financed through a combination of cash, debt and stock. The company said it is borrowing $22.5 billion from a consortium of banks.
The board of directors also decided to cut Pfizer's quarterly dividend in half to 16 cents a share.
Pfizer announced that it would ramp up its focus in treatments for Alzheimer's disease, inflammation, cancer, pain and psychosis, and continue to focus on vaccines and biotechnology.
"The new company will be an industry leader in human, animal and consumer health," said Pfizer chief executive Jeffrey Kindler, in a press release. "Its geographic presence in most of the world's developed and developing countries will be unrivaled."
Pfizer also reported a 90% plunge in quarterly net profit. The company said its diluted earnings per share plummeted to 4 cents in the fourth quarter, from 40 cents the prior year.
The company blamed a $2.3 billion charge to resolve allegations from federal prosecutors that it had promoted Bextra for uses not approved by the FDA. Bextra, an anti-arthritis drug, was pulled off the market after Merck's (MRK, Fortune 500) Vioxx was withdrawn in 2005.
Pfizer also reported a slight decline in fourth-quarter revenue to $12.9 billion, from $12.3 billion the year before.
This is the first big merger since 2006, when the telecom giant AT&T (ATT) merged with BellSouth for $67 billion. After that deal, AT&T cut 10,000 jobs.
In an interview on Friday, Miller Tabak analyst Les Funtleyder said that a Pfizer-Wyeth merger could lead to more job cuts at Pfizer, which recently announced that it was cutting up to 8% of its research staff, or up to 800 jobs.
"I can say with pretty good confidence that this is going to lead to some head count reduction," said Funtleyder.
Pfizer's (PFE, Fortune 500) stock price slipped in pre-market trading, while Wyeth's (WYE, Fortune 500) edged up.
One of Pfizer's chief challenges is finding a replacement for the cholesterol-cutting Lipitor, the top-selling drug of all time. The drug's annual sales peaked at nearly $13 billion in 2006, but revenue will plummet when Lipitor's patent expires in 2011.
European pharma shares mostly higher after Pfizer
Mon Jan 26, 2009 12:29pm GMT
LONDON, Jan 26 (Reuters) - Shares in European drugmakers were broadly higher after Pfizer (PFE.N) announced it was buying Wyeth (WYE.N) for $68 billion, but traders were sceptical about the deal triggering a bout of large mergers in the sector.
AstraZeneca (AZN.L), GlaxoSmithKline (GSK.L) and Novartis (NOVN.VX) were 1 to 2.1 percent higher, while Sanofi-Aventis (SASY.PA) was down 2 percent.
Wyeth shares traded in Frankfurt (WYE.F) were up 10 percent while Pfizer (PFE.F) was down 1.5 percent
The deal would help Pfizer cope with a major gap in revenue in 2011, when its blockbuster Lipitor cholesterol treatment will begin to face U.S. generic competition.
Next year, Wyeth loses patent protection on its own top drug, the antidepressant Effexor XR.
"We think this is a backward step and is not without risks. Wyeth faces significant claims by more than 10,000 women in the U.S. who allege that hormone replacement products Prempro and Premarin can cause breast cancer," said Jeremy Batstone-Carr, at Charles Stanley.
"However, without a major acquisition for Pfizer its earnings could be hit hard," he added.
"I don't think further acquisitions are the answer in the sector. Companies will continue with strategies to build exposure to the East through agreements with generic operators in Asia," he said.
Other analysts said they expected more deals, but smaller ones that saw big drugmakers bolt on biotechs to fill a product gap.
"There could yet be some more consolidation on a smaller scale," said Richard Hunter, head of UK equities at Hargreaves Lansdown.
"What increasingly the large pharmaceutical companies are looking to do is to take on some of the small biotech research companies that have this specialised focus,"
"Another factor playing into this is the price of the companies ... companies looking to buy and taking a longer term view see this a good time as any to be doing it," added Hunter.
The DJ Stoxx European healthcare index .SXDP was up 0.5 percent. It is the best performing of the industry sectors so far this year, with a gain of 2.7 percent compared with a 7 percent fall in the broader market and a 22 percent fall in banks. (Reporting by Joanne Frearson; Editing by Hans Peters)
Pfizer Agrees to Pay $68 Billion for Rival Wyeth
By ANDREW ROSS SORKIN and DUFF WILSON
Published: January 25, 2009
The board of Pfizer, the world's largest drug maker, agreed to acquire a rival, Wyeth, for $68 billion, the companies announced Monday.
The deal 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.
It will also be the first big merger backed by Wall Street in months. While credit has been notoriously tight of late, five banks have agreed to lend Pfizer $22.5 billion to pay for the deal. Pfizer, which has roughly $26 billion in cash, would finance the remainder through a combination of cash and stock.
If completed as planned, the transaction would be the biggest merger since AT&T and BellSouth combined in a $70 billion deal in March 2006, according to the research firm Capital IQ.
Pfizer also said Monday that its net income for the fourth quarter dropped 90 percent from the period a year ago, citing a charge to resolve inquires into its off-label promotional practices. In its statement, it also said that it planned to its work force by about 10 percent and reduce the number of manufacturing sites.
Pfizer earned $268 million, or 4 cents a share, in the fourth quarter, down from $2.72 billion, or 40 cents a share, in the period a year ago. Revenue dropped 4 percent, to $12.35 billion. Excluding the $2.3 billion to settle the marketing inquiry, Pfizer had a profit of 65 cents a share. Analysts surveyed by Thomson Reuters had forecast 59 cents.
"The combination of Pfizer and Wyeth will meaningfully deliver Pfizer's strategic priorities in a single transaction," the Pfizer's chief executive, Jeffrey B. Kindler, said in a statement Monday. "Our combined company will be one of the most diversified in the industry and will benefit from complementary patient-centric units that match speed with the benefits of a global company's scale and resources."
The merger almost came unhinged at the 11th hour. While the boards of both companies agreed to the broad outlines of the deal and its price before the weekend, these people said, one issue was still a sticking point: whether Pfizer would be allowed to back out of the deal if the economy worsened or Wyeth's prospects faded.
In better times, deals often falter on matters of strategy or price. But in this case, because of the ailing economy, Pfizer has agreed to pay a staggering breakup fee, $4.5 billion, if it does not complete the deal under certain circumstances - if, for example, its credit rating drops and it can no longer finance the deal. That is almost twice the typical breakup fee for a deal of this size.
If the acquisition is completed, it may demonstrate that Wall Street is willing to lend again, at least to the nation's top companies with the best credit ratings.
"If banks need to send a message that they're loaning, they want to be loaning to this quality of company," said Catherine Arnold, an analyst at Credit Suisse.
Pfizer's bid is being financed by four banks that received federal bailout money: Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America, the people involved in the deal said. Such banks have been criticized for not doing more lending since they received the government aid.
Barclays, which acquired Lehman Brothers out of bankruptcy in the fall, is also providing financing, these people said.
Pfizer appears to be taking advantage of the bad market for credit to buy Wyeth at a lower price than it might fetch if competing bids were to emerge, which analysts do not expect.
"They have a unique opportunity now because not everybody can get that capital," said Barbara Ryan, an analyst at Deutsche Bank.
Because the combined company is expected to generate more than $20 billion in cash a year, Ms. Ryan said, "even when they borrow money, they will still have plenty of revenue."
Under the terms of the deal, Pfizer would pay $50.19 a share for the company - $33 a share in cash and 0.985 Pfizer shares worth $17.19 a share based on Pfizer's closing price on Friday. That is roughly a 29 percent premium over the share price before word of the deal leaked on Friday.
Both companies' boards of directors approved the deal.
Wyeth's management team would depart, the people involved in the negotiations said. Pfizer is also planning to cut its quarterly dividend in half to 16 cents, these people said, in an effort to maintain its credit rating.
After news reports disclosed the talks on Friday, investors applauded the possibility of a deal. Shares of Wyeth rose $4.91, or 12.6 percent, to close at $43.74. Pfizer climbed 24 cents, or 1.4 percent, to close at $17.45.
Pfizer expects to save $4 billion annually by combining with Wyeth; those savings will be phased in over three years.
Mr. Kindler of Pfizer, first approached Wyeth last spring with a phone call, people involved in the talks said. The negotiations heated up in the summer but appeared to collapse when the banking system went into a tailspin in September and October.
Since then, there were several brief moments when it appeared the deal would move ahead, but then the talks would fall apart once again, usually over financing, these people said. It was apparently only within the last week or so that the financing commitment came together.
For Mr. Kindler, a lawyer who came to Pfizer from McDonald's, the deal may be a job-saver. His and the company's most pressing challenge has been the impending expiration of patent rights to the cholesterol-lowering drug Lipitor - which accounted for a quarter of the company's 2007 revenue of $48 billion and remains the best-selling drug in the world. The patent ends in 2011.
Still, even with the Wyeth deal, much would remain undone for Pfizer as it faces product, patent and pipeline problems for other drugs as well.
"It's not just Lipitor," Ms. Arnold wrote last year in a report to investors. Pfizer faces a run of 14 patent expirations through 2014, which would add up to lost revenue of about $35 billion as those drugs give way to cheap generics, according to Ms. Arnold. Pfizer's patent problem is not unique among the big drug makers. Merck, Bristol Myers Squibb and Eli Lilly are all facing their own patent losses in the next five years. "Everybody's staring at the same challenges down the road," Ms. Ryan said.
She said that Mr. Kindler, who became chief executive in July 2006, had probably not been in a position to make a play for a company like Wyeth until after he had cut costs, revamped Pfizer's core business and accepted the reality that the research pipeline was not producing blockbusters. "Hope springs eternal from the research pipeline," Ms. Ryan said.
As part of the deal with Wyeth, both companies will have to repatriate tens of billions of dollars back into the United States, which could have a high tax cost. Pfizer reported $25.3 billion in revenue, 52.2 percent of its total, from overseas operations in 2007, according to securities filings.
If foreign profits were repatriated to the United States, Pfizer would have to pay the difference between the tax paid in the foreign country, as low as 5 percent in Ireland, for example, and the 35 percent tax rate in the United States.
Ms. Arnold said some tax penalties might be expected, but could be reduced by doing some of the buying and selling overseas.
"The experts that we've spoken to have very definitely said you can use offshore cash to buy offshore assets, and Pfizer and Wyeth both have very significant offshore subsidiaries that they place cash in," Ms. Arnold said. For example, she said, "Pfizer Ireland can use its cash to buy Wyeth Ireland or Wyeth Singapore."
Wyeth, with sales of about $23 billion for the 12 months that ended Sept. 30, has about $2.7 billion in cash and liquid assets, according to David S. Moskowitz, an analyst at Caris & Company, an investment bank.
Pfizer was advised by Goldman, JPMorgan and Barclays; Wyeth was advised by Morgan Stanley and Evercore Partners.
Erik Gordon, a professor at the Ross School of Business at the University of Michigan who follows biomedical industries, said Pfizer and Wyeth were a great fit that made the deal creditworthy.
First, because Pfizer has so much cash, the deal does not have to be highly leveraged with debt, Mr. Gordon said. Second, the two companies have enough overlap that they can achieve considerable saving through consolidating duplicate operations and cutting costs. And finally, parts of a combined operation could be spun off to raise money.
Mr. Gordon pointed to the animal health businesses of both companies - which, considered together, accounted for $2.8 billion in revenue and about $600 million in profit in the first nine months of 2008.
"They could sell that business for billions of dollars to either pay down the debt or service the debt," he said. In addition, he said Pfizer could resell Wyeth's consumer products business. He added: "This deal is the rare thing. This'll be the only money investment bankers make in a while."
Pfizer to Pay $68 Billion for Wyeth
Companies Post Declines in Quarterly Net, Plan Cost Cuts
Wall St Jnl
By MATTHEW KARNITSCHNIG
Pfizer Inc. on Monday agreed to pay $68 billion to acquire rival Wyeth, in the largest pharmaceutical deal in nearly a decade.
Separately, Pfizer said fourth-quarter net income plunged 90% on $2.3 billion in litigation charges and that it would cut a further 10% of its work force, while Wyeth also reported a decline in fourth-quarter net profit.
Pfizer is in talks to acquire rival drug maker Wyeth in a deal the could be valued at more than $60 billion. WSJ reporter Kelsey Hubbard and Health Blog Editor Scott Hensley discuss why Wyeth and how this deal would work for Pfizer.
Pfizer said Monday it will borrow $22.5 billion from a consortium of banks to finance the deal. The company plans to use stock and its cash reserves to fund the rest of the deal.
Pfizer offered Wyeth shareholders $50.19 per share, paying $33 a share in cash and 0.985 a share in Pfizer stock. That is a 29% premium over where the shares closed on Thursday before The Wall Street Journal reported that the two were in talks.
With a value of $68 billion, the deal is the largest takeover in the pharmaceutical sector since Glaxo Wellcome PLC acquired SmithKline Beecham PLC for $76 billion in 2000.
Wyeth Chief Executive Bernard J. Poussot and his management team aren't expected to remain with the company after the takeover, according to one person close to the deal. That would put control of Wyeth firmly in the hands of Pfizer Chief Executive Jeffrey B. Kindler, who took Pfizer's helm in 2006.
Since then, Mr. Kindler has earned a reputation as a cost cutter, firing more than 15,000 employees since January 2007. He also has shuttered laboratories and put manufacturing plants up for sale in order to make the company more efficient.
Pfizer first approached Wyeth about a deal in June but the talks stalled amid the market turmoil in the fall. The talks then gathered steam again over the past month.
The Wyeth deal -- set to close no earlier than late in the third quarter -- appears to be mainly driven by the pursuit of such efficiencies. Pfizer believes the deal will lead to annual savings of $4 billion by the end of the third year. That will include what Pfizer said is a 10% cut of its work force and closing five manufacturing plants.
The combined company will also have 17 products that generate more than $1 billion in annual sales. Pfizer said Monday it exceeded its cost-reduction target in 2008 by cutting total costs by $2.8 billion. The company had been hoping to reach at least $2 billion.
Meanwhile, Pfizer's fourth-quarter net income fell to $266 million, or 4 cents a share, down from $2.72 billion, or 40 cents a share, a year earlier. Excluding items including the settlement of investigations regarding off-label marketing of pain drug Bextra, earnings rose to 65 cents from 50 cents. Bextra was pulled from the market in 2005 amid concerns the drug was linked to an increased risk of heart attacks and strokes.
Revenue fell 4.1% to $12.3 billion, hurt by patent expirations during 2008 and the strengthening dollar.
Analysts surveyed by Thomson Reuters had expected earnings of 59 cents on revenue of $12.54 billion.
Looking ahead, the company said it expects 2009 earnings of $1.85 to $1.95 a share, excluding items, on revenue of $44 billion to $46 billion. Analysts were expecting $2.49 and $48.81 billion in revenue.
As for Wyeth, its fourth-quarter net income fell 5.8% to $960.4 million, or 71 cents a share, compared with $1.02 billion, or 75 cents a share, a year earlier. Excluding restructuring costs, earnings were flat at 78 cents. Revenue decreased 7% to $5.3 billion, hurt by the impact of the strengthening dollar. Analysts had expected earnings of 79 cents on revenue of $5.79 billion.
Gross margin increased to 74.9% from 71.7% amid a 2.5 percentage-point boost from currency rates on costs of goods sold.
A group of five banks -- Goldman Sachs Group Inc., Bank of America Corp., J.P. Morgan Chase & Co., Barclays PLC and Citigroup Inc. -- have each agreed to provide $4.5 billion in financing for the Wyeth purchase, according to a person familiar with the transaction.
Pfizer will pay for the deal with roughly one third in borrowed money, one third in stock and one third from cash reserves.
Under the loan agreement, the banks can withhold financing if Pfizer's credit rating falls below a certain threshold. If that occurs, Pfizer would have to pay Wyeth a reverse breakup fee of $4.5 billion. That potential penalty is very high by historical norms and underscores the difficulty of completing deals in the current environment.
In order to protect its credit rating - which sits just below AAA - Pfizer plans to cut its quarterly dividend, which was 32 cents per share in the last quarter, by half. That should save the company more than $1 billion per quarter.
Pfizer first approached Wyeth about a deal in June, but the talks stalled amid the market turmoil in the fall. The negotiations then gathered steam again over the past month.
Wyeth's advisers on the deal were Morgan Stanley and New York-based Evercore Partners, a boutique advisory firm. Pfizer's advisers included Goldman Sachs, J.P. Morgan and Merrill Lynch & Co.
Meanwhile, Crucell NV said Wyeth pulled out of friendly takeover talks with the Dutch vaccine maker. Crucell admitted the discussions earlier this month, and people familiar with the matter at the time valued Crucell at 1 billion ($1.3 billion).
-Kerry Grace and Kevin Kingsbury contributed to this article.