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The Pfizer-Wyeth merger

Published on 02/02/09 at 09:14am

Before the merger, Pfizer faced a significant contraction in sales. Datamonitor's analysis suggests that the company's sales were declining at a compound annual growth rate (CAGR) of 3.5% to 2013, due to a raft of key patent expiries, most notably that of its blockbuster statin product Lipitor (atorvastatin).

With global revenues of $12.4 billion, the Lipitor franchise accounted for over 28% of Pfizer's total prescription pharmaceutical sales in 2008. However, Lipitor is due to lose US patent exclusivity in 2011: an event that will trigger a significant decline in Pfizer's revenues over the subsequent months as generic competition enters the market.

Although Lipitor will act as the focal point of Pfizer's visible generic threat, it is not the only blockbuster brand that faces a significant decline in revenues over the period 2008-13. The hypertension therapy Norvasc (amlodipine) lost patent exclusivity in 2007, as did the Zyrtec (cetirizine) franchise, indicated for allergic rhinitis. Erectile dysfunction treatment Viagra (sildenafil) - arguably the world's best-recognised pharmaceutical brand - is due to lose patent exclusivity in 2012, while Detrol LA (tolterodine; overactive bladder) and Camptosar (irinotecan; primarily colon cancer) are also forecast to act as key sales growth resistors over the period 2008-13 as a result of patent expiration.

Theoretically, Pfizer's executives could have accepted this wave of expiries and decided to lead a slimmed-down, leaner Pfizer out of the other side of the intense burst of generic competition. Of course, in reality, as a public company, Pfizer has had no choice but to yield to investors' insatiable demand for continued profit growth. Given Pfizer's already huge $40 billion-plus scale, its internal R&D pipeline cannot support near-term sales expansion organically. The only way forward, therefore, is to 'buy growth' through M&A.

Merger dilutes sales decline but won't solve Pfizer's patent problems

It is clear that Pfizer's merger with Wyeth will dilute the company's prescription pharmaceutical sales decline, but this will be insufficient to offset the contraction completely. As a result, Pfizer-Wyeth is forecast to record combined prescription pharmaceutical revenues of approximately $55bn in 2013, versus sales of around $61bn in 2008 (equivalent to a CAGR of -2.3% for 2008-13).

Although this compares favorably with the forecast sales CAGR of -3.5% for Pfizer excluding Wyeth, it is illustrative of the fact that Wyeth's prescription pharmaceutical sales growth performance through to 2013 will also be challenged by exposure to patent expiry and generic competition.

The company's depression treatment Effexor XR (venlafaxine) is due to lose patent exclusivity in 2009, gastrointestinal therapy Protonix (pantoprazole) will face generic competition from 2010 onwards and the antibacterial Tazocin (piperacillin) lost patent exclusivity in 2007. All of these products are forecast to act as key sales growth resistors within the Wyeth portfolio over the period 2008-13.

However, the merger is not just focused on prescription pharmaceuticals: Wyeth will expand Pfizer's presence in non-prescription pharmaceutical markets, most notably consumer healthcare and animal health. Having divested its own consumer healthcare business to Johnson & Johnson in 2006 in order to sharpen its focus on prescription pharmaceuticals, it would appear that Pfizer has taken a U-turn in order to embrace diversification of its business.

This strategy will indeed benefit the merged company in terms of anticipated sales growth performance, with Pfizer-Wyeth total company sales forecast to deliver a CAGR of -0.6% over 2008-13 versus a forecast CAGR of -2.3% for the combined core prescription pharmaceutical business. Nonetheless, even with the inclusion of non-prescription sales, Pfizer-Wyeth total company sales are forecast to stand below $70bn in 2013. This is a significant contraction from the scale of the merged entity's 2008 sales.

Cost cutting the only realistic route to profit growth

The acquisition of Wyeth will dilute rather than cure Pfizer's negative sales outlook and with declining sales there is only ever one route to delivering profit growth to investors: cost cutting.

Pfizer has announced that it expects to create savings of $4bn by the third year after closing the acquisition, a target that is partially dependent on an anticipated 15% reduction in Pfizer-Wyeth's combined workforce. These cuts include a headcount reduction of around 8,000 at Pfizer, announced on the same day as the acquisition.

Datamonitor forecasts Wyeth's operating profit to increase at a CAGR of 4.3% for the period 2008-13, versus a CAGR of -5.3% for Pfizer despite its ongoing cost-containment strategy and driven by the considerable decline in top-line revenues triggered by Lipitor's patent expiry.

Factoring in the reported $4bn cost savings anticipated for 2012, in addition to ongoing initiatives at both Pfizer and Wyeth, Datamonitor forecasts a combined Pfizer-Wyeth entity to record an increase in operating profit of 0.9% over 2008-13.

Merger will bring Pfizer much-needed strategic diversification

For too long the majority of Pfizer's drug portfolio has embodied the archetypal Big Pharma 'product set': small molecule products in me-too drug classes, directed against heavily genericised therapy areas such as cardiovascular. The merger with Wyeth will bring the positive impact of significant portfolio diversification away from these intensely competitive markets.

In 2008, for example, Pfizer generated approximately 98% of total prescription pharmaceutical sales from small molecules, the bedrock molecule type of the pharmaceutical industry and the primary segment of the market (at a molecule type level) to face competition from a voracious generics industry. In contrast, Wyeth operates with a more diversified molecule type offering, generating around 18% of 2008 prescription pharma revenues from therapeutic protein products and a further 16% from vaccine products.

Both the therapeutic protein and vaccine markets are considerably less susceptible to the threat of generic erosion (and therefore are forecast to be stronger growing segments of the pharmaceutical market), offering a clear motive for Pfizer's diversification into these technology areas.

The combined Pfizer-Wyeth entity would derive around 89% of prescription pharmaceutical revenues from small molecules, 7% from therapeutic proteins and 5% from vaccines, illustrating the immediate impact of Wyeth on Pfizer's biologics and vaccines capabilities. Elsewhere, Pfizer-Wyeth will initially have a negligible presence in the high-growth monoclonal antibodies market but late-stage pipeline products suggest that a revenue presence could be rapidly established in this area.

At the therapy area level, Pfizer's strong historical focus on the cardiovascular market will dissipate markedly as a result of the acquisition, a trend that will accelerate further once Lipitor revenues collapse in 2011 as a result of patent expiry.

Furthermore, Wyeth's minimal presence in the cardiovascular market (accounting for just 0.8% of prescription pharmaceutical sales in 2008) dovetails neatly with Pfizer's announcement in September 2008 that it would end R&D investment in this therapy area. This is a landmark strategic move for the company, given the dominance of cardiovascular drugs in Pfizer's marketed portfolio/R&D pipeline over the past two decades.

Confirmation of Pfizer's long-term exit from the cardiovascular therapy area came when the company also announced a re-alignment of its internal R&D focus on six core disease areas: Alzheimer's disease, cancer, diabetes, inflammation, pain and schizophrenia. The merger will further enhance this strategic move at the therapy area level, given Wyeth's strong presence in the central nervous system and immunology & inflammation disease areas.

Pfizer will retain its industry leading position In addition to these benefits, the merger will - crucially - allow Pfizer to retain its status as the industry's biggest-selling company. Prior to its acquisition of Wyeth, Pfizer had been forecast to relinquish its industry-leading position to Roche (inclusive of revenues derived from its majority ownership of Genentech) in 2012, following Lipitor's expiry. By 2013, Novartis, Sanofi-Aventis and GlaxoSmithKline had also been forecast to overtake Pfizer in terms of prescription pharmaceutical sales.

Now, however, despite a forecast 2008-13 prescription pharmaceutical sales decline for the combined entity, Datamonitor anticipates that Pfizer-Wyeth will remain the biggest-selling prescription pharmaceutical company through to 2013.

Related Stories:

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Monday, January 26, 2009

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The Pharmaceutical Market Outlook to 2018: Key threats and opportunities for Big Pharma and its responses to them

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