(RTTNews) – Rumors of a potential merger between drug giant Pfizer Inc. (
) have been doing the rounds since 2007. Now, it’s no more a rumor. It’s real and Pfizer is all set to acquire Wyeth in a $68 billion deal.
Monday, Pfizer announced that it has agreed to acquire Wyeth in a cash-and-stock transaction currently valued at $50.19 per share, or a total of about $68 billion. The Boards of Directors of both companies have approved the combination.
Under the terms of the transaction, Pfizer will pay $33 in cash and 0.985 of a share of its stock for each share of Wyeth. Based on the closing price of Pfizer stock as of January 23, 2009, the stock component is valued at $17.19 per share. The deal represents a premium of 15% over Wyeth’s closing stock price of $43.74 on Friday.
The transaction, which comes in the thick of the financial crisis, creates a pharmaceutical behemoth with combined revenue of about $75 billion. A consortium of banks has provided commitments for a total of $22.5 billion in debt to Pfizer to finance the deal.
The proposed transaction, which is subject to customary closing conditions, including antitrust clearance, is expected to close at the end of the third quarter or during the fourth quarter of 2009.
In connection with the proposed transaction, Pfizer has decided to reduce its quarterly dividend per share by half to $0.16. The deal is expected to be accretive to Pfizer’s adjusted earnings per share in the second full year after closing and yield cost savings of about $4 billion to be fully realized by the third year after closing.
Patents covering some of Pfizer’s key drugs are set to expire in the next few years. The company’s cholesterol-lowering Lipitor, one of the drug industry’s historical best-selling drugs with annual sales of about $12 billion, is set to lose patent protection in November of 2011. The drug accounted for 26% of the company’s total sales in 2008.
With patent expirations looming large, and with the pipeline not likely to churn out any new products in the immediate future, the acquisition of Wyeth will help to fill Pfizer’s impending revenue gap. Wyeth’s key drugs include Enbrel, a drug prescribed for rheumatoid arthritis and other auto-immune diseases, antidepressant drugs Effexor and Effexor XR and Prevnar, a pneumococcal vaccine. Enbrel topped $3 billion in total sales, Effexor raked in worldwide revenue of $3.93 billion, while Prevnar notched up sales of $2.72 billion in 2008.
For the combined company that will be an industry leader in human, animal and consumer health, no drug is expected to account for more than 10% of the revenue in 2012.
Pfizer would also inherit the legal woes related to Wyeth’s hormone replacement drugs Prempro and Premarin. Wyeth’s hormone replacement therapy drugs, Premarin and Prempro touted as “magic bullets” are indicated for the relief of hot flashes and night sweats, associated with menopause. After the U.S. government’s Women’s Health Initiative study found that healthy postmenopausal women enrolled in the study who were treated with the hormone replacement therapy drugs, Premarin and Prempro had increased risk of invasive breast cancer, stroke and blood clots, Wyeth came under fire. The study, which was to continue until 2005, came to an abrupt halt in early June 2002. Wyeth is facing claims by more than 10,000 women in the U.S, who allege that they developed breast cancer after taking the hormone replacement therapy drugs.
Pfizer has grown mostly by acquisitions which were stock-swap deals except for a few cash transactions. Some of the best-selling drugs of Pfizer were added to its roster as a result of acquisitions. Pfizer acquired full rights to Lipitor, following its merger with Warner-Lambert in February 2000 in a $90 billion stock-swap deal. Celebrex and its follow-on drug, Bextra were added to Pfizer’s arsenal of drugs through the acquisition of Pharmacia Corp. in 2002. Pfizer acquired Pharmacia for $60 billion in stock. Bextra, a painkiller was taken off the market in 2005 due to health risks.
In the fourth-quarter ended December 31, 2008 Pfizer’s net income plunged to $266 million or $0.04 per share from $2.72 billion or $0.40 per share in the year-ago quarter, hurt mainly by charges associated with the resolution of certain litigations involving its non-steroidal anti-inflammatory pain medications Bextra and Celebrex.
On an adjusted basis, earnings climbed 29% to $4.39 billion or $0.65 per share from $3.40 billion or $0.50 per share in the prior year quarter. First Call/Thomson Financial analysts were looking for earnings of $0.59 per share for the quarter.
Quarterly revenue decreased 4% to $12.35 billion from $12.87 billion last year and came below analysts’ consensus estimate of $12.54 billion.
Wyeth’s net income for the fourth-quarter was $960.39 million or $0.71 per share, down from $1.017 billion or $0.75 per share in the year-ago period. Excluding charges related to the company’s productivity initiatives, quarterly earnings were $1.049 billion or $0.78 per share, compared to $1.059 billion or $0.78 per share in the previous year. Wall Street analysts expected earnings of $0.79 per share. Analysts’ estimates typically exclude one-time items.
Wyeth’s net revenue for the quarter dropped to $5.348 billion from $5.763 billion in the prior year and came below analysts’ estimates of $5.79 billion.
Pfizer, which has been in restructuring mode since 2005, has retained its focus on cutting costs, including outsourcing and offshoring to ease the pressure on its top line.
From 2005 to the end of 2008, Pfizer has reduced its workforce significantly. Pfizer paid $2.03 billion in severance costs in 2007, compared to $809 million in 2006 and $303 million in 2005.
Pfizer has about 81,900 employees and Wyeth has about 47,500 employees. According to Pfizer, a new cost-reduction initiative that is going to be implemented is expected to result in incremental savings of approximately $3 billion by the end of 2011. As part of this cost-reduction initiative, Pfizer intends to reduce its workforce by approximately 10%. The company also intends to reduce the number of manufacturing sites to 41 from 46, as well as reduce its facilities square footage by approximately 15%. In conjunction with this program, Pfizer expects to incur costs of approximately $6 billion on a pre-tax basis, of which $1.5 billion has been incurred. In addition, Pfizer is also planning to reduce the combined workforce by 15%.
Following the announcement of the deal, Standard & Poor’s Ratings Services said it may lower Pfizer’s ‘AAA’ ratings to the “AA” category, “given the additional leverage and continuing challenge of medium-term patent expirations on important products”.
PFE is currently down 9.46% trading at $15.80 on a volume of $134 million shares.
WYE is up 0.59% trading at $44 on a volume of 66.26 million shares.
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