Reports have Pfizer in talks to buy Wyeth

NEW YORK - Pfizer Inc., the world's largest drugmaker, may be seeking to buy rival Wyeth in a deal that could be valued at more than $60 billion and result in significant job losses at both companies.

The proposed merger, the biggest in recent memory, could hit Wyeth, which employs about 4,700 people in the Philadelphia region, especially hard, some industry observers said.

"Generally, in this kind of deal, you would be looking at 25 to 30 percent cost reduction, but here it's going to be more like 50 percent," said Daniel Hoffman, an area pharmaceutical analyst.

That's because the weak economy and expected health-care reform are already pressuring industry sales.

The Wall Street Journal reported today that the companies have been in talks for months, although the report said that any deal is not near completion and that the state of the global markets could undo any plans.

Such a deal could cheer investors and analysts who have been pushing Pfizer - struggling with flat revenue, diminishing returns on research and looming generic competition to the world's top-selling drug - to make a bold move to get out of its doldrums.

Until now, it has been taking baby steps, cutting staff here, closing plants there, and trimming its research portfolio.

But acquiring Madison, N.J.-based Wyeth would transform Pfizer almost overnight from basically a pure pharmaceutical company into a broadly diversified health-care giant, given Wyeth's huge presence and revenue in biotech drugs, vaccines including the blockbuster pneumococcal vaccine Prevnar and consumer health products from Advil to Robitussin.

"Such an acquisition makes strategic and financial sense," Credit Suisse analyst Catherine Arnold wrote to investors, adding that the reported deal was not a surprise. "This deal would instantly make [Pfizer] a top-tier biologics player."

She added that Wyeth would boost Pfizer's revenue and cash flow in the short term, and its profits in both the short and long term, and "may also mark the beginning of a year of sector consolidation," Arnold said.

Representatives for both Wyeth and New York-based Pfizer declined to comment.

"It's our policy not to comment on marketplace rumor," Wyeth spokesman Doug Petkus said.

More than four fifths of Wyeth's revenues in the first nine months of last year came from its pharmaceuticals operations, which are based in Collegeville, Montgomery County, and Malvern, Chester County.

The company employed about 6,000 at those sites in 2007.

Shares of Wyeth were up $4, or 10.30 percent, to $42.83 in midafternoon trading on the New York Stock Exchange. Pfizer shares were down 11 cents, or 0.64 percent, to $17.10. Such declines are typical for a company doing a big acquisition.

Pfizer is the world's top drugmaker by revenue, led by the blockbuster cholesterol drug Lipitor, which tallies about $13 billion in annual sales - about one-quarter of Pfizer's entire revenue. Lipitor is expected to face generic competition in November 2011, and a high-profile effort to come up with a successor drug flamed out when torcetrapib had to be axed in late-stage testing because it triggered heart problems.

Last fall, Pfizer publicly conceded that failure when it narrowed its research areas and eliminated all new research on heart disease, the world's top killer.

That's left Pfizer chief executive Jeff Kindler under pressure to take some kind of preemptive action, with investors upset that its share price is barely one-third of its July 2000 peak of $48.

Pfizer announced Jan. 13 that 800 scientists worldwide would be laid off.

Wyeth faces generic competition to its top seller, antidepressant Effexor, in July 2007. Heartburn drug Protonix got generic competition last year, when antibiotic Zosyn also lost patent protection, but that drug still has no generic competitors.

In any case, Wyeth's fortunes don't depend as heavily on any one drug as Pfizer's do on Lipitor. Pfizer's massive "patent cliff" includes the expected loss of more than 70 percent of its 2007 revenue by 2015, noted Arnold, whose firm has conducted investment banking or other business with the two drugmakers.

Wyeth is now one of the world's top biotech drugmakers and most of its revenue now comes from those drugs, vaccines and veterinary medicines, not chemically synthesized pills.

Wyeth's stable of consumer products - including household names such as Chap Stick, Centrum vitamins, pain reliever Anacin and Preparation H - is nearly as valuable as the iconic brands Pfizer sold to Johnson & Johnson in 2006 when it chose to get out of consumer health and focus on pharmaceuticals. Pfizer had a plant in Lititz, Pa., that makes Listerine and other consumer products.

In the last 10 years, Pfizer has been a major consolidator of the pharmaceutical industry, making 35 acquisitions, including the purchases of Warner Lambert for $116.23 billion in 2000 and Pharmacia for $60.34 billion in 2003.

The deals have not done much for shareholders, who have seen the value of their shares fall by about 5 percent annually over that period.

By contrast, Johnson & Johnson made even more acquisitions, but in a more diverse range of businesses, helping Johnson & Johnson shares to an average annual gain of nearly 6 percent in the last 10 years.

Wyeth has straggled along, losing about 1 percent a year over the same period.

Some analysts have called that a mistake, including Steve Brozak of WBB Securities, who was also critical of any Pfizer-Wyeth deal.

"This is a fix for the next 12 to 18 months. This still doesn't resolve the fundamental flaw in the large-pharma model," he said, referring to companies relying on blockbusters and narrowing research rather than forging lots of partnerships with small biotech firms and academic researchers to develop as many compounds as possible. "They're going to combine the two entities, eliminate redundancies, and just focus on the bottom line earnings numbers, which doesn't work in the long run."

Analysts have predicted tie-ups in the pharmaceutical industry in recent months as most big companies prepare for a wave of major patent expirations over the next few years. Like most rivals, Pfizer and Wyeth have slashed jobs and other costs to prepare for that period, and Pfizer is widely expected to announce plans to eliminate one-third of its sales force when it announces fourth-quarter earnings next Wednesday, the day before Wyeth releases its results.

At the same time, the Food and Drug Administration has become more cautious in approving new drugs, leading to greater research expenses and costly delays in getting drugs approved.

Pfizer and Wyeth have responded by focusing on specific diseases and scrapping research areas considered less promising. Pfizer is concentrating on Alzheimer's disease, cancer, schizophrenia, pain, inflammation and diabetes. Wyeth's core areas are cancer vaccines and drugs, neurological disorders, inflammation, metabolic disorders and musculoskeletal conditions.

Wyeth got three drugs approved last year - antidepressant Pristiq, Relistor for constipation caused by narcotic painkillers, and the hemophilia drug Xyntha. But shortly before that it had a grinding stretch where the FDA repeatedly shot down its applications or demanded more information.

Wyeth got its start in 1860, when John Wyeth and his brother, Frank, opened a drugstore at 1410 Walnut St. John Wyeth & Brother Inc., as the company was known, later built a manufacturing plant at 11th Street and Washington Avenue. American Home Products, founded in 1926, bought Wyeth in 1931 from Harvard University, which had received the company as a bequest at the death of the last Wyeth heir.

American Home Products, once a diversified giant selling foods, agricultural products and medical-devices in addition to drugs, adopted the name of its pharmaceutical subsidiary in 2002 after selling most of its other operations.

At more than $60 billion, the deal's price tag would dwarf Eli Lilly & Co.'s buyout of biotech cancer drug maker ImClone Systems in October.

Wyeth shares closed at $38.83 Thursday and have traded between $49.80 and a 12-year low of $28.06 in the past 12 months. Wyeth's market capitalization is $51.7 billion.

In November, Pfizer shares set an 11-year low of $14.26. The stock was worth $17.21 at the end of trading on Thursday. The company has a market capitalization of about $116 billion.