Bottom Line: Mega-mergers can give a shot in the arm for ailing pharma giants

 
Julian Harris
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BACK in 2010, around the time that Jeffrey Kindler suddenly quit his job as Pfizer’s chief exec, I had a chat with a (somewhat less senior) employee at the company who was pleasingly relaxed about discussing its prospects – or a lack thereof.

“We have no idea what the plan is,” they confided, happily treating me more like an Agony Aunt or career adviser than a voracious business journalist.

Scottish-born Ian Read took over from Kindler at the time, and has faced a rough ride since. Sales fell from over $65bn in 2011 to $51.6bn last year. The latest results, published in January, may have beaten market expectations yet the fundamentals remain problematic.

“Pfizer’s recent pipeline launches Xeljanz and Eliquis have both materially disappointed,” wrote Citi analyst Andrew Baum yesterday.

America’s biggest drug-maker has long faced the same problems as its peers, with a pipeline that is hardly bursting with new opportunities, and expiring patents hitting sales.

The reaction in much of the industry has been to search for bolt-on acquisitions. Mega-mergers have become less prevalent as the years roll on, with many believing that they are simply not worth the gargantuan effort they entail.

Yet when McKinsey analysts crunched the numbers earlier this year, studying 17 super-deals from between 1995 and 2011, they found that overall “mega-mergers created shareholder value” and that consolidation deals “generated greater economic profit”.

The twist? Pfizer’s $68bn takeover of Wyeth in 2009 was an exception, “resulting in an overall decrease in economic profit”.

Contrary to conventional wisdom, mega-mergers can still work in the world of Big Pharma. The question for investors is whether or not Pfizer has picked the right target.

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