In 1999, Pfizer CEO, Bill Steere, told Forbes: “Mergers in the industry are done out of weakness. We are not weak.” A year later,
Steere wasn’t being disingenuous when he made his comment. He really had no appetite for such a major deal. However, circumstances forced his hand. Warner-Lambert was getting ready to join forces with American Home Products and, if this merger were to occur, Pfizer would eventually be eased out of its co-promotion deal with Warner-Lambert on Lipitor, which was on its way to becoming the biggest selling drug of all time. The loss of this jewel was never going to happen on Steere’s watch, and so the unthinkable was consummated.
The next Pfizer CEOs also took office without any intention of making a major acquisition. Yet, Hank McKinnell bought Pharmacia, Jeff Kindler snatched up Wyeth, and now Ian Read is stalking
The “new” Pfizer will have annual sales in excess of $70 billion allowing it to reclaim industry dominance. However, staying there will be a challenge. Pfizer has projected that in 2014 it will invest between $6.5 and $6.9 billion in R&D; for AZN this will be about $5 billion. One might think that, post-acquisition, Pfizer would invest close to $12 billion in 2015, the sum of the companies individually. However, that’s not how things work. When a company pays over $100 billion to take over a competitor, shareholders and analysts rightfully expect that significant savings will be made to help justify the deal. These savings, also known as “synergies” are expected across the entire company including R&D.
Looking back at the experience from the Pfizer purchase of Wyeth, one can get a sense of what to expect. In 2007, Pfizer’s R&D spend was $7.8 billion and Wyeth’s was close to $5 billion. By 2013, Pfizer had slashed its R&D budget to $6.55 billion, almost half of what the individual companies had invested in 2007. Thus, it’s unlikely that the “new” Pfizer will add a significant amount to its future R&D budget. For argument purposes, let’s say that Pfizer’s future R&D budget is $8 billion. Certainly, this is an enormous investment. However, is it enough to sustain a company with sales in excess of $70 billion? That’s highly unlikely. A pharmaceutical company has to reinvent itself every 12 – 15 years as the drugs it discovers and develops have finite patent lives. The challenge of regenerating a portfolio worth $70 billion, along with modest 5% annual growth, is a daunting challenge for any company. An $8 billion R&D budget will not nearly be enough.
Yet, pharmaceutical companies for decades have always gotten 30% of their revenues from drugs sourced from outside of its own walls. This is an important and necessary strategy. Pfizer will undoubtedly actively do this. However, given its size, Pfizer will need to bring in drugs that would generate a minimum of $25 billion in revenues. This is going to be a major challenge as Pfizer will be competing against the entire pharmaceutical industry to acquire these assets. Piecemeal addition of a drug here, a drug there, is not going to be sufficient.
The only way for a shark to survive is to keep going forward. To maintain its leadership, Pfizer will again need to make a major acquisition in the next 4 – 5 years. Given Pfizer’s policy that a CEO must retire at age 65, this duty will likely fall to the 60 year old Read’s successor. Consider it a right-of-passage for a Pfizer CEO. Care to speculate as to what company would be a prime take-over target in 2019?
