Executive Summary:
Pfizer-Wyeth Merger Deal Overview:
On January 25, 2009, Pfizer and Wyeth entered into the merger agreement, pursuant to which, subject to the terms and conditions set forth in the merger agreement, Wyeth will become a wholly-owned subsidiary of Pfizer. Upon completion of the merger, each share of Wyeth common stock issued and outstanding will be converted into the right to receive, subject to adjustment under limited circumstances, a combination of $33.00 in cash, without interest, and 0.985 of a share of Pfizer common stock in a taxable transaction. Pfizer will not issue more than 19.9% of its outstanding common stock at the acquisition date in connection with the merger. The exchange ratio of 0.985 of a share of Pfizer common stock will be adjusted if the exchange ratio would result in Pfizer issuing in excess of 19.9% of its outstanding common stock as a result of the merger
Deal Terms Breakdown:
Transaction Value Transaction Consideration
Purchase price per WYE share $50.19 Existing Cash Used $22,213 32.7%
Cash per WYE share $33.00 New Debt $22,500 33.1%
PFE stock value per WYE share $17.19 Total Cash $44,713 65.8%
PFE shares per WYE share 0.985 Stock Consideration $23,289 34.2%
Premium to 1/23/09 WYE price 29.3% Total Consideration $67,303 100.0%
Total WYE shares (MM,diluted) 1,341
Total Equity Value $68,001
Total Enterprise Value $65,339
Exhibit 3: Summary of Terms, PFE Acquisition of WYE at $50.19 per share (Per Credit Suisse Analyst Report)
Synergy Effects for the Pfizer and Wyeth Combined Firm:
1. Forming the world’s Premier Biopharmaceutical Company
2. Enhanced in-line and pipeline patent-protected portfolio in key “Invest to Win” disease areas, such as Alzheimer’s disease, inflammation, oncology, pain and psychosis
3. Acceleration of Growth in emerging markets
4. Creation new opportunities for established products
5. Creation of a low, more flexible cost base
Pfizer-Wyeth Merger Analysis
Pfizer History:
Pfizer Inc. is one of the leading research-based healthcare companies in the world. Following its June 2000 takeover of Warner-Lambert Company, Pfizer was organized into four groups: Pfizer Pharmaceuticals Group, Warner-Lambert Consumer Group, Pfizer Animal Health Group, and Pfizer Global Research and Development. Among the prescription drugs marketed by Pfizer Pharmaceuticals with annual revenues exceeding $1 billion are Norvasc, for the treatment of hypertension and angina; Lipitor, a cholesterol reducer; Zoloft, an antidepressant; Zithromax, an oral antibiotic; Diflucan, an antifungal product; and Viagra, the famous treatment for erectile dysfunction. Warner-Lambert Consumer markets a number of leading consumer brands, including such over-the-counter healthcare mainstays as Benadryl, Sudafed, Listerine, Visine, Rolaids, and Ben Gay; in the confectionery area, Trident, Dentyne, Certs, and Halls; Schick and Wilkinson Sword shaving products; and Tetra fish food. Pfizer Animal Health is a world leader in medicines for pets and livestock. On the development side, Pfizer Global R & D spends $4.5 billion a year shepherding candidates through the product pipeline, which at any one time can include more than 130 possible new products. R & D efforts also are aided by the 250 alliances that Pfizer has formed with academia and industry.
Pfizer SWOT Analysis:
Pfizer has extended its leadership position by acquiring its rival Wyeth for $68 billion. The company's large commercial infrastructure has positioned it as a marketing partner of choice. However, the blockbuster portfolio’s high level exposure to generic competition could significantly affect the company’s sales growth in future.
Strengths:
Blockbuster credentials remain strong (Lyrica, Sutent and Chantix/Champix)
Pfizer has launched a number of very successful products in recent years that are forecast to contribute significant levels of revenue growth over 2008–14. Chief among these is Lyrica (pregabalin), which is established as the market leading therapy in neuropathic pain and fibromyalgia and is forecast to contribute a change in sales of +$2.8 billion over 2008–14. Sutent (sunitinib)—primarily indicated for renal cell carcinoma (RCC)—has also recorded impressive sales growth since its launch in 2006 with 2008 global revenues recorded at $847 million. Sutent is forecast to contribute a change in sales of +$1.3 billion over 2008–14. The launch of Chantix/Champix has also provided a notable boost in revenue, by virtue of rapidly assuming market leading share in the prescription smoking cessation market; 2008 global revenues stood at $846 and are forecast to increase to $1,884 million by 2014.
Industry-leading sales & marketing infrastructure – Pfizer remains ‘marketing partner of choice’
An integral element of Pfizer’s commercial performance over the past 15 years has been its sales and marketing strength, particularly in the primary care segment. Despite significant reductions in sales force numbers over the past couple of years, this element of Pfizer’s commercial infrastructure remains strong, particularly in the US market where direct-to-consumer (DTC) advertising has been used to impressive effect by the company. As a result, Pfizer retains its status as a marketing partner of choice, reflected by consolidated Alliance Revenues of $2,251 million in 2008 which are forecast to increase to $3,120 million by 2014 (Datamonitor, Pfizer, Inc.: PharmaVitae Profile, CSHC1454, July 2009).
Significant scale in relation to peer set rivals
Pfizer benefits from economies of scale that the majority of rival Big Pharma players cannot achieve, underscored by the corporate strategy of large scale M&A that has propelled the company to the industry summit over the past decade. Pfizer has sought on a number of occasions to increase the ‘buffer zone’ that exists between itself and rival players and has achieved this once again via its recently announced acquisition of Wyeth.
Weaknesses:
Blockbuster-centric growth model exacerbates generic erosion to revenues
While Pfizer’s operating performance benefits from economies of scale relating to the size of its revenue base, it has become increasingly difficult for the company to continue growing sales at rates in line with historical precedent (without the further use of large scale M&A activity). A contributory factor has been Pfizer’s adherence to a blockbuster driven growth model, the success of which has become increasingly undermined in recent years by an aggressive generics industry. Sales growth over the period 2002-08—at a CAGR of 7.7%—was heavily driven by the acquisition of Pharmacia in 2003 and held back by loss of patent exclusivity for a number of brands (Norvasc, Neurontin, Zithromax, Zyrtec). Furthermore, Lipitor revenue growth has slowed substantially since mid-2006 due to the ‘indirect generic impact’ of therapeutic substitution via loss of patent exclusivity for Merck & Co.’s rival statin Zocor.
Entrenchment in primary care segment / lack of presence in specialty care market
Pfizer’s blockbuster portfolio—which accounted for approximately 60% of total prescription pharmaceutical sales in 2008—is heavily focused on the primary care market. Correlated to the proliferation of small molecule products in primary care segments (see below), Pfizer remains exposed to the most aggressive forms of cost containment and adverse pricing and reimbursement policies in established markets. This barrier to sales growth is most evident once patent expiry has occurred with cost containment efforts driving aggressive loss of branded market share once cheaper generics reach the market.
Minimal penetration of the biologics market to date
In 2008, Pfizer generated approximately 98% of total prescription pharmaceutical sales from small molecule products and only has a minimal presence in the biologics market via its growth hormone product Genotropin. The commercial implications are two-fold: Pfizer has missed an opportunity to extract revenues from the high growth biologics market and, virtually Pfizer’s entire prescription pharmaceutical portfolio is (or will be at some stage) exposed to generic competition by virtue of the overriding dependence on small molecule drug technology.
Opportunities:
Diversification of prescription pharmaceutical offering via Wyeth acquisition
Pfizer’s acquisition of Wyeth will provide a significant diversification of its core prescription pharmaceutical business, most notably with regard to molecule type. Having previously generated almost all prescription pharmaceutical sales from small molecule products—the only product type exposed to a fully-developed generics industry—the integration of Wyeth provides access to revenues derived from vaccine and therapeutic protein products. Furthermore, Pfizer’s long term (and somewhat overdue) efforts to enter the biologics arena should benefit from Wyeth’s experience. Indeed, Pfizer/Wyeth is forecast to enter the monoclonal antibodies market a number of years after the acquisition closes. M&A related cost cutting In addition to the impact of Wyeth’s integration on its research and commercial operations, a key driver of Pfizer’s large scale M&A strategy is the opportunity for substantial cost cutting in order to drive increased profitability. Pfizer has forecast significant cost savings of $4 billion three years after the acquisition is completed.
Enhanced presence in emerging markets supported by established primary care portfolio and generics collaborations
Pfizer is seeking to enhance its presence in emerging markets—as illustrated by the designation of a specific business unit in its post-Wyeth acquisition operating structure—and this represents an opportunity for sizeable sales growth. Pfizer should be able to extract sales growth from a broad primary care portfolio and in the process extend the life-cycles of key blockbuster brands facing patent expiry/which have already faced genericization. Pfizer looks set to support the sale of its own brands via collaborations to market generic pharmaceutical products in such markets, as demonstrated by its recent deals with Indian manufacturers Aurobindo Pharma Ltd. and Claris Life sciences Ltd., announced in May 2009.
Threats:
High level of exposure to generic competition over 2008-14
Pfizer will face an unprecedented level of exposure to generic competition over 2008-14, with its statin product Lipitor acting as the focal point. All products in Pfizer’s ‘expiry portfolio’ will deliver a combined annual decline in sales of -$17.8 billion over 2008-14, with Lipitor alone delivering a decline of -$10.1 billion triggered by the loss of patent exclusivity in 2011. Exposure to generic
competition will act as the primary driver of Pfizer’s prescription pharmaceutical sales CAGR of -3.7% for 2008-14 (Datamonitor, Pfizer, Inc.: PharmaVitae Profile, CSHC1454, July 2009).
Potential for Sutent clinical trial setbacks + Chantix/Champix ‘recovery’ may not be as robust as Forecast
In order to compensate for some of the generic erosion to revenues over 2008-14, Pfizer is heavily reliant on the performance of three products over this period: Lyrica, Sutent and Chantix/Champix.
While Lyrica now appears to be a well established product—as demonstrated by market leading status in the neuropathic pain and fibromyalgia settings—there remains the potential for setbacks to the Sutent and Chantix/Champix franchises. Continued revenue growth for Sutent through to 2014 depends partially on approval in additional tumor types; the recent termination of clinical trials in both colon cancer and breast cancer settings indicates that forecasts could be lowered moving forward if further setbacks occur. In the case of Chantix/Champix, Datamonitor’s forecast for the product is reliant on Pfizer’s smoking cessation therapy making a robust bounce back in sales following updated labeling to warn of neuropsychiatric symptoms.
Continued M&A activity dilutes innovation at R&D level
There remains an inherent threat with Pfizer’s ‘scale by M&A strategy’ that innovation at the R&D level will become diluted, particularly if staff are lost and/or cost containment results in certain R&D projects being prematurely terminated. The alternative strategy would be to develop small scale R&D collaborations or make a series of smaller, specialist acquisitions with a particular disease/therapy area/technology focus. Pfizer’s recently announced operating structure appears to be partially designed to counter the threat of diluted R&D innovation and productivity in a recently enlarged company, with individually accountability across each business unit a notable corporate mantra in recent company publications.
Wyeth History:
Wyeth is a global pharmaceutical research and manufacturing company. It develops and markets traditional pharmaceuticals, vaccines, and biotechnology products that serve both human and animal health care. It has strong product lines in both prescription medications and in consumer health products, including over-the-counter (OTC) medications and nutritional supplements. Wyeth markets its products in more than 140 countries, and has manufacturing facilities on five continents. During the 1990s, Wyeth--which at the time was called American Home Products (AHP)--began selling off the wide-ranging businesses it had acquired over the years, retaining a focus on medicine and pharmaceuticals. In 2002, the company changed its name from American Home Products to Wyeth.
The company recorded revenues of $22,399.8 million during the fiscal year ended December 2007, an increase of 10.1% over 2006. The operating profit of the company was $6,075.6 million during the fiscal year 2007, an increase of 17.9% over 2006. The net profit of the company was $4,615.9 million during the fiscal year 2007, an increase of 10% over 2006. This significant growth in its revenues would be a major strength as it would help the company earn huge profits. Increasing revenues when compared to that of its competitors and industry would provide a favorable affect on the profitability and market share of the company.
Extensive Production Network
Wyeth Pharmaceuticals has an extensive production network. The company and its subsidiaries have almost 37 manufacturing facilities in 15 countries throughout the world. Also, the company has significant ongoing capital projects that support its additional manufacturing capacity in few countries such as New York, Sanford, Ireland, and Massachusetts. An extensive production network enables the company to enhance the quality of its customer service and reduce transportation costs as well as risks.
Focused R&D Activities
The company spent almost $6.29 billion, $6 billion and $5.3 billion on research and development including Pharmaceuticals research and development for the fiscal years ended 2007, 2006 and 2005 respectively. The R&D activities of the company are chiefly focused on Pharmaceutical Research and Development, Biopharmaceuticals, Vaccines Research and Development, Consumer Health Global Scientific Affairs and Fort Dodge Animal Health Research and Development procedures used for the treatment and prevention of diseases. Also, the Wyeth holds various research alliances with the companies such as GVK Bio, Raven, Biotica, CSL Limited and Elan. The company’s ongoing R&D activities and pre-clinical projects have resulted in the development of new products.
Weaknesses:
High Indebtedness
During the fiscal year 2007, the company had an amount of $11,492.9 million as long-term debt. This long-term debt would require Wyeth to dedicate certain portion of its cash flows to service such debt and would impose restrictions on its business activities. Such lower cash flows would increase the need to finance its capital expenditure and working capital needs through further borrowings increasing the debt content and reducing the cash flows further. This would also make Wyeth lose its competitive advantage over its competitors with lower debt content. Thus, such high
indebtedness of the company would negatively affect the results of operations and the financial position.
Opportunities:
Product Launch
The company has introduced new products namely Torisel and Lybrel. Torisel was approved by the in 2007, used for the treatment of patients suffering from advanced renal cell carcinoma. Also, Torisel is approved by European Commission in November 2007 as the first line therapy for the treatment of advanced renal cell carcinoma. Lybrel was launched in May, 2007 as a new low-dose, non-cyclic continuous combination oral contraceptive. New product launches would help the company enhance its portfolio and thus fuel its revenues and profitability.
Emerging Markets
Emerging markets offer a strong growth opportunity for the company, which can leverage its strong brand and product portfolio to take advantage of rapid growth in these markets. Emerging markets such as the Latin American and South-East Asian countries are fast evolving as new market opportunity for pharmaceutical companies who are registering lower growth in major markets such as USA and Japan. Driven by rising incomes and increased demand for quality healthcare, emerging markets registered the highest revenue growth during 2007. According to IMS Health, emerging markets contributed to more than a third to global pharmaceutical growth while the US contributed to 25% to the global growth, its lowest ever, during 2007. Growth from the emerging markets is projected to offset the maturing western markets with the emerging markets increasing their contribution to total global pharmaceutical sales from 17% in 2007 to 22% in 2020.
Biotech Focus
The company’s focus on biologics provides a new opportunity for the company to develop new drugs and drive the revenue growth. Biologics, which are manufactured from proteins sourced from living organisms, are bringing a paradigm change in the way the healthcare is administered. Biologics, which offer greater efficacy and innovative therapies, are one of the fastest growing market segments globally. According to IMS Health, the biologics were projected to grow at 15%, twice as fast when compared with pharmaceutical market during 2008. Also, biologics offer a definite competitive advantage to the company as they require shorter development times and provide greater patent protection as they are tougher to copy.
Rising Healthcare Expenditure in the US
Rising healthcare expenditure provides significant opportunities for the company to continue to generate revenue growth. According to the US government’s Center for Medicare and Medicaid Services (CMS), healthcare expenditure in the country rose 6.8% to surpass $2 trillion and represented 16% of the country’s Gross Domestic Product (GDP) in 2007. According to the Congressional Budget Office, if the growth in healthcare spending continues at its current pace, CMS
spending and private health costs will increase from the current 16% of GDP to 25% in 2025. Of the total healthcare expenditure, though prescription drugs represent smaller components of the total healthcare spend (10% in 2006), it is one of the fastest growing components of the total healthcare spend.
Threats:
Generic Competition
The company may face substantial competition from products produced by other pharmaceutical companies and biotechnology companies, including generic alternatives for its products. In recent times the generic competitors have become more aggressive as the generic products are gaining larger markets. Wyeth has previously experienced the generic competition from the generic drug manufacturers like Teva, Sun and KUDCo for its product, PROTONIX. The products from the EFFEXOR and PRISTIQ brands are facing stiff competition with another serotonin norepinephrine reuptake inhibitor (SNRI), several selective serotonin reuptake inhibitors (SSRIs) and other antidepressant products. The company believes that around 98% of the prescription for the EFFEXOR has converted to the generic version after the generic launch by Teva in 2006. The expiration of patent coverage for venlafaxine in the US in June 2008 and in most major European markets in December 2008 resulted into significant competition for the company. Hence, the expirations of patents and rising competition from the generic drug manufacturers is likely to affect the financial health of the company.
Manufacturing Problems
Few of the products manufactured by the company are difficult to manufacture including PREVNAR and ENBREL which are sources from certain manufacturing facilities. The manufacturing processes of these processes are very critical. Any minor deviations from the normal process would change the product structure and content resulting in further failures resulting in launch delays, inventory shortages, product recalls, and regulatory action. Further, interruptions in the production due to equipment malfunctions, labor problems, power outages etc. could also result in delays and unanticipated costs. Further the company is not sure to meet the increasing demand for its products or install new production capacity in its sites. Such operational faults would adversely affect the manufacturing operations and lead to cancellation of its orders due to delays in delivery of products.
Increased Pricing Control
The company’s ability to price its drugs is under significant threat following the increased level scrutiny over the cost effectiveness of treatments from government as well private payers. Spurred by rising healthcare costs, European governments in particular, have established semi-independent organizations to evaluate if the drugs prices are in-line with the kind of results they deliver. During first half of 2008, UK’s National Institute for Health and Clinical Excellence (NICE) recommended that its National Health Service not pay for six different cancer drugs, including Genentech’s Avastin, either for lack of efficacy or for being too expensive versus other options. Though US has not established any such organizations, the US private payers are controlling the patients access to the drugs by evaluating the cost effectiveness of various drugs and placing them in various tiers,
with different tiers requiring different levels of contributions from patients. Further, US payers are running programs which incentivize patients to use certain preferred drugs.
Tightening of the FDA’s Regulatory Oversight
Increased regulation of the drug market is expected to increase the company’s cost and reduce revenue as getting drugs to market becomes a longer and more expensive process. Following the intense public scrutiny post the Vioxx product recall, the congress passed the Food and Drug Administration Amendments Act of 2007 (FDAAA), which significantly expanded the FDA’s regulatory oversight. The amendment empowers the FDA to mandate drug companies to further study the safety of medicines and issue new label warnings when safety issues arise. The FDA now requires that every drug application includes a post-market risk management program for three years after launch. Further, the increased safety concerns have led the FDA to delay approvals for several therapies with the agency opting to issue “approvable letters” instead of giving the final approval.
The approvable letters mandate the manufactures to submit more clinical data for the FDA to approve the final product. The additional data required by the agency could require further trials, thereby delaying the product launch for several months to years. Currently pharmaceutical companies spend on an average $1 billion and 8 years to develop a new drug.
Emergence of Biogenerics/Biosimilars
The proposed regulatory approval for the introduction of biogenerics / biosimilars, generic versions of biologic drugs, increases the threat of uncertainty to the company. Until recently, there was no generic competition to the biotech industry as there was no regulatory framework in place to approve generic version of biotech drugs. Most regulators felt that biologic drugs, unlike the pharmaceutical drugs, are hard to copy as they are manufactured from living cells which are hard to replicate. However, the situation is changing fast with European regulatory authority approving Omnitrope, a generic version of human growth protein, and issuing guidelines for approving generic versions of select biologic drugs. The move towards establishing such a regulatory framework in the US is likely to intensify in the near future with Barack Obama, who is in favor of increased utilization of generics to control the rising healthcare costs.
Pfizer-Wyeth Merger Synergies:
Combination Overview:
The combined company creates one of the most diversified companies in the global health care industry. Operating through patient-centric businesses that match the speed and agility of small, focused enterprises with the benefits of a global organization’s scale and resources, the company is able to respond more quickly and effectively to meet changing health care needs. The combined company allows for product offerings in numerous growing therapeutic areas, a strong product pipeline, leading scientific and manufacturing capabilities, and a premier global footprint in health care.
With its broad and diversified global product portfolio and reduced dependence on small molecules, the new company positions itself for improved, consistent, and stable top-line and
EPS growth and sustainable shareholder value in the short and long term. It is expected that no drug will account for more than 10 percent of the combined company’s revenue in 2012. The combination with Wyeth meaningfully advances in a single transaction each of the strategic priorities that Pfizer has identified and pursued over the last two years, including:
• Enhancing the in-line and pipeline patent-protected portfolio in key “Invest to Win” disease areas, such as Alzheimer’s disease, inflammation, oncology, pain and psychosis
• Becoming a top-tier player in biotherapeutics and vaccines
• Accelerating growth in emerging markets
• Creating new opportunities for established products
• Investing in complementary businesses
• Creating a lower, more flexible cost base.
World’s Premier Biopharmaceutical Company:
The merger between Pfizer & Wyeth produces the world’s premier biopharmaceutical company whose distinct blend of diversification, flexibility, and scale positions it for success in a dynamic global health care environment. The merger positions the new company with the opportunity to be an industry leader in human, animal and consumer health. With its combined biopharmaceuticals business, it will lead in primary and specialty care as well as in small and large molecules. Its geographic presence in most of the world’s developed and developing countries will be unrivaled.
For Patients Today- A Broader Portfolio of Health Care Solutions and Treatments
The combined company offers customers and patients a broad range of products for every stage of life--with top tier portfolios in key therapeutic areas such as cardiovascular, oncology, women’s health, central nervous system, and infectious disease and a diverse product portfolio that includes 17 products with more than $1 billion each in annual revenue. With the acquisition, Pfizer becomes the second largest specialty care provider, with products including the world’s leading biologic, Enbrel; Prevnar, the world’s largest-selling vaccine; Sutent for cancer; Geodon for schizophrenia; and Zyvox for infection. The transaction also builds upon Pfizer’s position as a global leader in animal health, with strong product lines in attractive segments, for companion animals, biologics and anti-infectives.
For Patients Tomorrow – A Diverse Range of Technology and Research Platforms
The new company will have more resources to invest in research and development than any other biopharmaceutical company and access to all leading scientific technology platforms, including vaccines, small and large molecules, nutritionals and consumer products.
The combination also brings together a robust pipeline of biopharmaceutical research and development projects, including programs in diabetes, inflammation/immunology, oncology and pain, as well as significant opportunities in Wyeth’s Alzheimer’s disease pipeline. The new company will have an enhanced ability to innovate, operating as focused business units tailored to patients and other customers. Each business unit will oversee product development from clinical trials to commercialization. This approach will allow for rapid decision making and a more efficient use of resources and, as a result, will enhance the company’s ability to invest in long-term opportunities. The combination will also provide additional high quality and high volume
manufacturing capabilities, including Wyeth’s Grange Castle, Ireland facility, the largest integrated biotechnology manufacturing facility in the world.
For Patients Everywhere – A Strong Global Presence
Geographically, the combination will enhance Pfizer’s and Wyeth’s compelling portfolios in important growth areas. Based on IMS data, the combined company will be number one in terms of biopharmaceutical revenues in the United States with an approximately 12% market share; in Europe with an approximately 10% share; in Asia (ex-Japan) with an approximately
7% share; in Japan with a 6% share; and in Latin America with a 6% share. Pfizer and Wyeth’s combined presence will be significant in high-growth emerging markets, such as Latin America, the Middle East and China, where Wyeth has an impressive presence in infant nutritionals and Pfizer is a recognized leader in pharmaceuticals. This enhanced geographic position will further strengthen the combined company’s business, provide increased exposure to high-growth, less-developed and under-penetrated markets, and provide compelling opportunities for expense savings.
Industry Analysis (Merger Time):
Merger, Acquisitions, and Alliance Activity
Over the past six months, a flurry of deals in the pharmaceutical sector suggested that vaccines were the new M&A targets. Recent health scares over global pandemics and the growing number of governments stockpiling vaccines became major driving forces in the pharmaceutical sector. Sales of vaccines boosted the bottom lines of pharmaceutical companies and grew much faster than sales of other prescription drugs. Vaccine makers are attractive M&A targets for larger pharmaceutical firms set on replenishing their product pipelines as exclusivity on existing best-selling products nears an end. Moreover, vaccines are more complicated to produce, and therefore less susceptible to generic competition.
Pharmaceutical Outsourcing Set to Grow
Nowadays, pharmaceutical companies face harsh pressures across a wide spectrum of issues —intense competition, patent expirations, rising R&D costs and sluggish product pipelines. As a result, over the last few years the trend for outsourcing has become more widely accepted as a means of freeing up funds and boosting operational flexibility and overall performance. Many pharmaceutical companies outsource their manufacturing, research, packaging or logistics operations to third-party organizations. One of the major pharmaceutical outsourcing markets is contract manufacturing. As per Mergent, global pharmaceutical contract manufacturing market will exceed US$30 billion by 2010.
Aside from outsourcing to international CMOs and CROs, pharmaceutical firms can and will also look to outsource their operations to countries with cheaper operational costs.
European drug makers are looking at Eastern European countries such as Poland and Slovakia as their labor and operational costs are cheaper. However, outsourcing to Eastern European markets is threatened by other competitively priced markets such as China and India. Nonetheless, the Eastern European market is modern and lucrative, so some foreign drug makers that want to
access domestic markets or utilize the high-technological facilities available in the region prefer to outsource to Eastern Europe. With its huge potential, it is hoped that the outsourcing sector will attract more foreign companies in the future and thus help boost Europe’s weakening pharmaceutical industry.
Generics Drugs Market Still Going Strong
The US generic drugs market continues to grow steadily, in terms of both prescriptions and sales. The US is the world’s largest generic drug market, and one of the very few countries worldwide where generics fill more than 50% of prescriptions. According to 2008 figures by the Generic
Pharmaceutical Association (GPhA) and IMS Health, generic drugs accounted for 69% of all prescriptions dispensed in the US, which in turn meant a value of US$60 billion in sales. It is expected to surpass US$100 million in 2012 as patents for many biologics expire. For generic drug makers, this more complex biotech market will help offset an expected drop in small-molecule patent expirations starting in 2013.
Over the next five years, more drugs will go off-patent but fewer new products will be coming to market. It’s good news in the short term for generics, which will continue to outpace the market. IMS Health expects a banner year for generics in 2011, with US$42 billion in global drug sales at risk of generic competition, including some US$32 billion in the US alone. That’s up from an expected US$28 billion in global sales in 2009 and US$17 billion in 2008.
The Emerging Target Cancer Therapies Market
Targeted cancer therapies represent a new type of cancer treatment and have significantly changed the treatment of cancer over the past decade. Targeted cancer therapies use drugs that block the growth and spread of cancer. They interfere with specific molecules involved incarcinogenesis (the process by which normal cells become cancer cells) and tumor growth. Because scientists call these molecules “molecular targets”, these therapies are sometimes called “molecular-targeted drugs”, “molecularly targeted therapies” or other similar names. By focusing on molecular and cellular changes that are specific to cancer, targeted cancer therapies may be more effective than current treatments and less harmful to normal cells. Targeted therapies have led to improvements in treatment outcomes across many tumor types, allowing some of them to become the standard-of-care in their approved indications. The resulting high level of uptake, coupled with their premium prices, make targeted therapies the leading therapy class in the oncology market in terms of sales. Targeted therapies generated respectively 45% of global oncology sales in 2007, underlining the very attractive premium prices enjoyed by targeted oncology therapies compared with other therapeutic classes. A number of targeted therapy cancer brands have achieved blockbuster sales, and have become important sources of revenue for some of the leading pharmaceutical and biotech companies.
Not surprisingly, a growing number of companies have turned their attention to the cancer targeted therapy market, undoubtedly trying to follow the blockbuster status that several brands have already achieved. Since 2005, ten new branded targeted drugs have entered the market. With more pipeline drugs looking likely to gain approval in the near future, the market is set to become even more competitive and fragmented.
The Loss or Expiration of Intellectual Property Rights
As is inherent in the biopharmaceutical industry, the loss or expiration of intellectual property rights are continuing to have adverse effects on revenue. Many products have multiple patents that expire at varying dates, thereby strengthening overall patent protection. However, once patent protection has expired or has been lost prior to the expiration date as a result of a legal challenge, firms lose exclusivity on these products and generic pharmaceutical manufacturers generally produce similar products and sell them for a lower price. This price competition can substantially decrease revenues for products that lose exclusivity, often in a very short period of time. While small molecule products are impacted in such a manner, biologics currently have additional barriers to entry related to the manufacture of such products and therefore generic competition may not be as significant.
Pricing and Access Pressures
Governments, managed care organizations and other payer groups continue to seek increasing discounts on products through a variety of means such as leveraging their purchasing power, implementing price controls, and demanding price cuts (directly or by rebate actions). Also, health insurers and benefit plans continue to limit access to certain medicines by imposing formulary restrictions in favor of the increased use of generics. Legislative changes have been proposed that would allow the U.S. government to directly negotiate prices with pharmaceutical manufacturers on behalf of Medicare beneficiaries, which we expect would restrict access to and reimbursement for our products. There have also been a number of legislative proposals seeking to allow importation of medicines into the U.S. from countries whose governments control the price of medicines, despite the increased risk of counterfeit products entering the supply chain. If importation of medicines is allowed, an increase in cross-border trade in medicines subject to foreign price controls in other countries could occur and negatively impact industry wide revenues. Also, healthcare reform in the U.S., if enacted, could increase pricing and access restrictions on products and could have a significant impact on business.
Pfizer Financial Ratio Analysis:
Pfizer Financial Ratios
Growth Rate: Profitability Ratios
PEG Ratio 10.5 Net Profit Margin 15.26%
Sales (5 yr CAGR) 8.6 ROA 3.58%
EPS (5 yr CAGR) 14.9 Operating Income Margin 22.23% ROI 24.14%
Liquidity Ratios ROE 8.48%
Working Capital 24,445,000 (In Thousands) Financial Leverage Ratios
Quick Ratio 1.32
Current Ratio 1.66 Total Debt to Assets 27.0
Pfizer Financial Ratios Financial Leverage Ratios
Cash Ratio 0.05 Debt to Equity 64.06%
LT Debt to Work. Cap 213.51%
Investment Ratios
CAPEX as % of Total Assets 66.8%
R&D as % of Total Assets 3.7%
Exhibit 1: Financial Ratios
Exhibit 2: Pfizer Income Statement
Ratio Analysis:
A careful review of Pfizer’s balance sheet and income statement reveals some interesting facts. Before going into detail, it must be noted that in the merger with Wyeth, Pfizer assumed 22.5M in new debt (33.1%). This certainly explains the high spikes in the respective Debt to Assets, Debit to Equity, and LTD to Net working Capital Ratios in 2009 as compared to the years 2006-2008 (figures obtained from Pfizer’s Balance Sheet). Looking at Pfizer’s growth rates, sales and EPS look very positive over the next 3-5 years. The sales growth is fueled by the addition of the Wyeth Legacy products, and can also be attributable to the increases in R&D and Sales & General Administrative Expenses, which can justify the increased sales effort and emphasis by the firm.
When considering Pfizer’s liquidity, they seem to be very well positioned. They currently have enough cash, cash equivalents, and accounts receivables to cover their current liabilities. While Pfizer seems very liquid, the majority of the firm’s debt is long term. The lack of short-term debt may inflate these ratios significantly. Prior to acquiring Wyeth in October of 2009, Pfizer had very low levels of long term debt, but after the Merger Pfizer’s level of Long Term Debt increased by massive 555% figure.
Profitability seems to be generally on the decline at Pfizer. While the decline in the respective profitability ratios (Net Profit Margin, ROA, Operating Income Margin, ROI, ROE) can be due to the staggering economic environment, it is positive to note that the strong projected net income increase will certainly improving these ratios.
Deal & Analysis Valuation:
Overview of Deal
On January 25, 2009, Pfizer and Wyeth entered into the merger agreement, pursuant to which, subject to the terms and conditions set forth in the merger agreement, Wyeth will become a wholly-owned subsidiary of Pfizer. Upon completion of the merger, each share of Wyeth common stock issued and outstanding will be converted into the right to receive, subject to adjustment under limited circumstances, a combination of $33.00 in cash, without interest, and 0.985 of a share of Pfizer common stock in a taxable transaction. Pfizer will not issue more than 19.9% of its outstanding common stock at the acquisition date in connection with the merger. The exchange ratio of 0.985 of a share of Pfizer common stock will be adjusted if the exchange ratio would result in Pfizer issuing in excess of 19.9% of its outstanding common stock as a result of the merger (Pfizer-Wyeth Proxy Report, Pg. 41).
On October 15, 2009, the acquisition of Wyeth was completed. The acquisition was a cash-and-stock transaction valued, based on the closing market price of Pfizer’s common stock on the acquisition date, at $50.40 per share of Wyeth Common Stock, or a total of approximately $68 Billion.
Transaction Value Transaction Consideration
Purchase price per WYE share $50.19 Existing Cash Used $22,213 32.7%
Cash per WYE share $33.00 New Debt $22,500 33.1%
PFE stock value per WYE share $17.19 Total Cash $44,713 65.8%
PFE shares per WYE share 0.985 Stock Consideration $23,289 34.2%
Premium to 1/23/09 WYE price 29.3% Total Consideration $67,303 100.0%
Total WYE shares (MM,diluted) 1,341
Total Equity Value $68,001
Total Enterprise Value $65,339
Exhibit 3: Summary of Terms, PFE Acquisition of WYE at $50.19 per share (Per Credit Suisse Analyst Report)
Transaction Premium Analysis
Morgan Stanley calculated the implied premium to the average price of Wyeth’s common stock based on merger consideration per share of Wyeth’s common stock of $33.00 in cash and 0.985 of a share of Pfizer common stock and the weighted average price of Wyeth’s and Pfizer’s common stock derived from their closing prices on January 15, 2009, for periods varying from one calendar day to one calendar year. Morgan Stanley selected January 15, 2009 for the purpose of its analyses as it was the last trading day, in which the daily traded volume of Wyeth’s common stock was consistent with the average daily traded volume of Wyeth’s common stock over the previous six months (Pfizer-Wyeth Proxy Prospectus)
Morgan Stanley also noted that the merger consideration had an implied value of $50.19 per share of Wyeth’s common stock based upon the closing price of Pfizer’s common stock on January 23, 2009, the last trading day prior to announcement of the proposed merger, and that based on such value, an all-stock transaction using Pfizer’s closing stock price on January 23, 2009 would have resulted in an exchange ratio of 2.876 shares of Pfizer’s common stock for each share of Wyeth’s common stock. Morgan Stanley compared this exchange ratio to the closing price of Wyeth’s common stock relative to Pfizer’s common stock over varying periods of time and calculated the implied premium for each such period
Comparable Company Analysis
Morgan Stanley performed a comparable company analysis, which attempts to provide an implied value of a company by comparing it to similar companies. Morgan Stanley compared selected financial information for Wyeth with publicly available information for comparable healthcare companies that shared similar characteristics with Wyeth. Morgan Stanley considered various factors such as their global presence, market capitalization, business mix, product mix, product pipeline and product development activities in selecting the companies used in its analysis. The companies used in this comparison included those companies listed below:
U.S. Pharmaceutical Companies:
• Abbot Laboratories
• Bristol-Myers Squibb Company
• Eli Lilly and Company
• Johnson & Johnson
• Merck & Co., Inc.
• Pfizer Inc.
• Schering-Plough Corporation
• Amgen, Inc.
Based on the analysis of the relevant metrics for each of the comparable companies, Morgan Stanley calculated (i) that the mean P/E multiple was 10.7x and the mean P/E/G ratio was 1.8x and (ii) that Wyeth’s P/E multiple as of January 15, 2009, was 10.4x and its P/E/G ratio was 5.2x. Based on the relevant financial statistic(s) as provided by Wyeth management and publicly available
information, Morgan Stanley calculated that the price offered by Pfizer for each share of Wyeth’s common stock constituted an implied transaction P/E multiple of 13.6x and this represented an approximately 31% premium to Wyeth’s P/E multiple as of January 15, 2009.
No company included in the comparable company analysis is identical to Wyeth. In evaluating the comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters. Many of these matters are beyond the control of Wyeth, such as the impact of competition on the business of Wyeth and the industry in general, industry growth and the absence of any material adverse change in the financial condition and prospects of Wyeth or the industry or in the financial markets in general. Mathematical analysis, such as determining the arithmetic mean or median, or the high or low, is not in itself a meaningful method of using comparable company data.
Exhibit 4: PFE EPS Accretion/Dilution, in CS Base Case, Pro Forma an Acquisition of WYE at $50.19 per share (Per Credit Suisse Analyst Report)
Base Case Scenario- Assumes that PFE/WYE is very accretive (Exhibit 2). Of particular note is the period 2012 to 2015 where accretion is 29% to 46% respectively.
Refinancing is expected and important in regards to reducing interest rates on deal debt as will be discussed on subsequent pages. In addition, upside and downside EPS Accretion/Dilution scenarios are included as well (Exhibit 4 and Exhibit 5, respectively).
Exhibit 5: PFE EPS Accretion/Dilution, in CS Upside Case, Pro Forma an Acquisition of WYE at $50.19 per share (Per Credit Suisse Analyst Report)
Upside case- Implies accretion of 48% in 2012, growing to 66% by 2015. This scenario assumes a 6x DCF multiple, revenues of $70Bn (these are Pfizer’s projections) and synergies of $4.9Bn (16% of pro forma S,G&A and R&D, the highest seen in sector transactions).
Exhibit 6: PFE EPS Accretion/Dilution, in CS Downside Case, Pro Forma an Acquisition of WYE at $50.19 per share (Source: Credit Suisse Analyst Report)
Downside case- Implies accretion of 14% in 2012, growing to 30% by 2015. The downside case assumes reductions in synergies ($3Bn rather than the $4Bn guidance) and revenues (a 10% haircut to our base case revenues of $66.4Bn).
Exhibit 7: PFE Acquisition of WYE- Implied Transaction Multiples and Premiums Compared to Historical Deals and Current Trading Multiples (US$ in Multiples, Per Credit Suisse Analyst Report) Exhibit 8: Analysis of Selected Major Pharmaceuticals M&A Transactions (Source: Credit Suisse Analyst Report)
I believe that the transaction price is fair to generous on some historical compares (Exhibit 5 and Exhibit 6). The assessment of the purchase premium is challenged by the volatile and depressed market conditions. At $50.19/share (the announced price), Pfizer is paying 29% premium to Wyeth shares on the day before media reports of a deal (January 22nd) and 52% premium versus the 3-month price. The 3 month compare of a 52% premium to share price seems generous versus the mean premium of 32% and median of 28%. On the other hand the deal price seems low on a enterprise value multiple assessment.
DCF Valuation & Analysis:
A discounted cash flow analysis was conducted, which is designed to imply a value of a company by calculating the present value of estimated future cash flows of the company. Ranges were calculated using implied equity values per share for Wyeth, based on discounted cash flow analyses utilizing Wall Street analyst estimates compiled by Credit Suisse Management for the calendar years 2009 through 2015. In arriving at the estimated equity values per share of Wyeth’s common stock, a terminal value was calculated by applying a range of perpetual free cash flow growth rates. Growth rate ranges were applied by incorporating a number of factors, including growth of the overall economy, projected earnings expectations for
comparable pharmaceutical companies and Wyeth’s upcoming patent expiration profile. Credit Suisse Management observed that this range implied P/E multiples for Wyeth that were consistent with the P/E multiples of the comparable companies studied by the team and identified above under “— Comparable Companies Analysis.” The unlevered free cash flows and the terminal value were then discounted to present values using a range of weighted average cost of capital from 7.0% to 9.0%. Credit Suisse Management selected this range using the capital asset pricing model. The weighted average cost of capital is a measure of the average expected return on all of a given company’s equity securities and debt based on their proportions in such company’s capital structure. Credit Suisse Management calculated ranges of implied equity values per share for Pfizer, based on the discounted cash flow analyses using Wall Street analyst estimates compiled and Pfizer management projections for the calendar years 2009 through 2015. In arriving at the estimated equity values per share of Pfizer’s common stock, Credit Suisse Management calculated a terminal value by applying a range of perpetual free cash flow rates. These rates were derived, based on Credit Suisse’s judgment, after considering a number of factors, including growth of the overall economy, projected earnings expectations for comparable pharmaceutical companies and Pfizer’s upcoming patent expiration profile. The unlevered free cash flows and the terminal value were then discounted to present values using a range of weighted average cost of capital from 6.0% to 10.0%. Credit Suisse selected this range using the capital asset pricing model. Based on the calculations set forth above, this analysis implied a range for Pfizer’s Equity value/Share, ranging from 22.56 to 24.93 per share.
Summary & Conclusion:
Can one conclude that the deal was an overall success for Pfizer? Yes. I believe that the transaction price is fair to generous on some historical compares (Exhibit 5 and Exhibit 6). The assessment of the purchase premium is challenged by the volatile and depressed market conditions. At $50.19/share (the announced price), Pfizer is paying 29% premium to Wyeth shares on the day before media reports of a deal (January 22nd) and 52% premium versus the 3-month price. The 3 month compare of a 52% premium to share price seems generous versus the mean premium of 32% and median of 28%. On the other hand the deal price seems low on a enterprise value multiple assessment.
When taking into the account the figures prior to and after the merger, the liquidity ratios, profitability ratios, Financial Leverage Ratios, Investment Ratios, Pfizer certainly had enough cash and assets on hand to cover short term and current liabilities. Though Pfizer did absorb a lot of debt in the merger, the projected future sales and revenue figures should allow Pfizer to pay down the debt.
Moreover, when evaluating the success of the transaction, one has to focus on the obvious synergy effects that a deal of this magnitude would bring about. Pfizer will become the world’s premier biopharmaceutical company whose distinct blend of diversification, flexibility, and scale positions it for success in a dynamic global health care environment. The new company will be an industry leader in human, animal and consumer health. It will allow itself to Enhancing the in-line and pipeline patent-protected portfolio in key “Invest to Win” disease
areas, such as Alzheimer’s disease, inflammation, oncology, pain and psychosis; Becoming a top-tier player in biotherapeutics and vaccines; Accelerating growth in emerging markets; Creating new opportunities for established products; Investing in complementary businesses; and Creating a lower, more flexible cost base. With these Synergies (beneficial for both Pfizer and Wyeth), coupled with the new revenue and sales opportunities that will come about because of this conglomeration, one can definitely say that this deal has the foundational aspects to become a successful one.
References:
1) BMO Capital Markets Large-Cap Pharmaceuticals Report, January 2009
2) Credit Suisse US Major Pharmaceuticals Report, January 2009
3) Credit Suisse Pfizer and Wyeth Acquisition Report, February 2009
4) Pfizer-Wyeth Proxy Report, June 2009
5) www.Pfizer.com
6) WRDS Data Base
7) S&P Net Advantage Database
