Pfizer Will Pay $68B For Wyeth

Pfizer Inc. is buying rival drugmaker Wyeth in a $68 billion deal that will increase its revenue by 50 percent, solidify its No. 1 rank in the troubled industry and transform it from a pure pharmaceutical company into a diversified health care giant.

At the same time, Pfizer announced cost cuts that include slashing more than 8,000 jobs as it prepares for an expected revenue crash when its cholesterol drug Lipitor - the world's top-selling medicine and source of one-quarter of Pfizer's revenue - loses patent protection in November 2011.

The cash-and-stock deal, expected to close at the end of the third quarter or in the fourth quarter, comes as Pfizer's profit takes a brutal hit from a $2.3 billion legal settlement over allegations it marketed certain products for indications that have not been approved. The New York-based company is also cutting 10 percent of its work force of 81,900, slashing its dividend, and reducing the number of manufacturing sites from 46 to 41. Those closures, and reducing its facilities square footage by about 15 percent, will cost about $6 billion before taxes, of which $1.5 billion has been incurred, Pfizer said.

After the deal closes Pfizer expects to cut more jobs. The company said it expects eventually to cut the companies' combined workforce by 15 percent, a figure that includes the Pfizer cuts announced Monday.

The company, which has been under pressure from big investors to make a bold move, said it has not identified which plants it will close.

Job cuts at Pfizer will begin in the first quarter and are to be complete by 2011, according to company spokesman Ray Kerins. Cuts will include most departments, from administration in sales to manufacturing and research.

"It will be done in a methodical way," Kerins said. "We will continue to look at the staffing needs of the company and make decisions based on those needs."

Pfizer said it anticipates the new cost-cutting program will reduce spending by about $3 billion, $1 billion of which will be reinvested in the business. That's on top of an existing cost-cutting program that has produced about $2.8 billion in annual savings, compared with 2006 levels.

Pfizer Chief Financial Officer Frank D'Amelio said in a statement that the tie-up will bring about $4 billion in cost savings by the end of 2012. The company said the deal should add to Pfizer's earnings per share in the second full year after closing.

Early Monday, Pfizer, the maker of Lipitor and impotence pill Viagra, said it will pay $50.19 per share under for Wyeth, valuing Madison, N.J.-based Wyeth at a 14.7 percent premium to the company's closing price of $43.74 Friday.

Both companies' boards of directors approved the deal but Wyeth shareholders must do so, antitrust regulators must review the deal and a consortium of banks lending the companies $22.5 billion must complete the financing.

The deal is being financed by five banks, according to Kerins. They are Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs and JPMorgan Chase.

The deal is likely to be reviewed by the Federal Trade Commission, which splits antitrust oversight with the Justice Department and typically handles pharmaceutical acquisitions.

FTC spokesman Mitch Katz said the agency doesn't comment on pending transactions.

Analysts were split on how good the deal is.

"This deal doesn't bring Pfizer the cure for Lipitor" revenue losses, but it brings short- and long-term cost savings, said Erik Gordon, biomedical analyst and professor at University of Michigan's Ross School of Business. "It increases Pfizer's research capabilities in biologics (drugs made from living cells), and it's good for Wyeth because Wyeth will now be able to tap into Pfizer's marketing machine."

Credit Suisse analyst Catherine Arnold wrote to investors that the deal's addition to Pfizer earnings "should be massive." She thinks earnings could be boosted even before the second year, as Pfizer is predicting.

In a note to investors, she wrote that high-yield fund managers will find the dividend cut - from 32 cents to 16 cents - disappointing.

The deal is likely to be closed, she added. "The high cash contingent may make it difficult for interlopers to intercede, as it involves both Pfizer's existing cash, and new debt" of $22.5 billion.

Pfizer shares fell $1.49, or 8.5 percent, to $15.96. Wyeth shares rose 49 cents to $44.23.

Analyst Steve Brozak of WBB Securities said the acquisition will bring Pfizer profit and revenue growth but still doesn't solve its long-term problem of not having enough promising drugs in its pipeline.

"The question becomes what are they going to do to fill that research," Brozak said, adding, "They're going to be laying off literally tens of thousands of people."

Pfizer has been under pressure from Wall Street to make a bold move as it faces what is referred to as a patent cliff in the coming years. As key drugs lose patent protection they will face generic competition and declining sales. Lipitor is expected to face generic competition starting in November 2011. It brings in nearly $13 billion per year for the company.

Acquiring Wyeth helps Pfizer diversify and become less-dependent on individual drugs - Lipitor now provides about one-fourth of all Pfizer revenue - while adding strength in biotech drugs, vaccines and consumer products. Wyeth makes the world's top-selling vaccines, Prevnar for meningitis and pneumococcal disease, and co-markets with Amgen Inc. the world's No. 1 biotech drug, Enbrel for rheumatoid arthritis.

"The combination of Pfizer and Wyeth provides a powerful opportunity to transform our industry," Pfizer Chairman and Chief Executive Jeffery B. Kindler said in a statement. "It will produce the world's premier biopharmaceutical company whose distinct blend of diversification, flexibility, and scale positions it for success in a dynamic global health care environment."

Together, and the two companies will have 17 different products with annual sales of $1 billion or more, including top antidepressant Effexor, Lyrica for fibromyalgia and nerve pain, Detrol for overactive bladder and blood pressure drug Norvasc.

Shortly after announcing the Wyeth deal, Pfizer said fourth-quarter profit plunged on a charge to settle investigations into off-label marketing practices. The company earned $268 million, or 4 cents per share, compared with profit of $2.72 billion, or 40 cents per share, a year prior. Revenue fell 4 percent to $12.35 billion from $12.87 billion.

Excluding about $2.3 billion in legal charges, the company says profit rose to 65 cents per share.

Analysts polled by Thomson Reuters expected profit of 59 cents per share on revenue of $12.54 billion.

Looking ahead, New York-based Pfizer expects earnings per share between $1.85 and $1.95 in 2009, below forecasts for $2.49.

Wyeth said its fourth-quarter profit declined 5.6 percent, to $960.4 million, or 71 cents per share, down from $1.02 billion, or 75 cents per share, in the 2007 quarter.

Excluding productivity-initiative charges, the company earned 78 cents per share in the latest quarter. Worldwide revenue fell 7 percent to $5.35 billion, dragged down partly by unfavorable currency exchange rates.

Analysts on average expected Wyeth to earn 79 cents per share on revenue of $5.79 billion.

Wyeth said it isn't giving financial guidance for 2009.