Desperation fuels Pfizer run at Wyeth

By Bill Berkrot and Ransdell Pierson - Analysis

NEW YORK (Reuters) - Pfizer Inc (PFE.N) Chief Executive Jeff Kindler has called mega-mergers disruptive and distracting, but desperation over the impending patent loss on the world's best-selling drug may be just the shotgun steering Pfizer to the altar with U.S. rival Wyeth WYE.N.

Pfizer is in talks to acquire Wyeth for more than $60 billion, sources say, in what would be its third giant acquisition after purchases of Warner-Lambert and Pharmacia made it the biggest name in the industry.

Last March, Pfizer laid out a strategy for dealing with the 2011 loss of patent protection on its $12 billion a year cash cow, the cholesterol drug Lipitor, that did not involve huge acquisitions. But the failure of its research pipeline to yield many major new medicines appear to have renewed Pfizer's appetite for big deals.

"I think it shows their desperation," said Natixis Bleichroeder analyst Jon LeCroy.

"Without a pipeline it doesn't much matter what a company does. Kindler's been there a couple of years now, and the view is not much has been done," LeCroy said. "So this was sort of inevitable if he wanted to keep his job."

Sanford Bernstein analyst Tim Anderson said buying Wyeth, with its lucrative vaccines, biotechnology medicines and consumer products, may be Pfizer's only choice.

"Pfizer's R&D (research and development) track record has not been a good one and the sheer volume of product it stands to lose to generics means it would have to have unprecedented R&D success to overcome these future losses," Anderson wrote in a research note. "Buying another company like Wyeth may therefore be the only realistic solution for Pfizer."

That was clearly not the way Kindler saw things last year, when he told journalists that large acquisitions "can be very disruptive; it can slow things down and distract people."

The company declined to comment on reports that it was in negotiations with Wyeth.

"I think it represents a departure from recent policy, because at least all public statements prior to about three months ago were that Pfizer would do bolt-on acquisitions, or product acquisitions, but not a mega-merger," said Sam Isaly, portfolio manager of OrbiMed Advisors, who believes almost all mega-mergers in the past 15 years, including those by Pfizer, have failed to reward investors.

Indeed, Pfizer's shares are trading just above 10-year lows hit late last year.

"Jeff Kindler is the most recent in a long string of losers at Pfizer," said Isaly, who is not one to mince words.

"He really inherited a junk pile. Even so, his board is going to insist that he do something. He doesn't have much more time left, nor should he have much time left," Isaly said of the CEO.

Like Isaly, LeCroy expressed skepticism about whether the deal makes sense for Pfizer.

"I don't think it's going to pay off for them," LeCroy said. "Pfizer's problem was they were already too big, and so just making the company bigger doesn't solve the issue. The real issue is the R&D productivity is not there."

But Mike Krensavage, principal at Krensavage Asset Management, said: "The pros of a Pfizer/Wyeth deal probably outweigh the cons."

Although Wyeth next year loses patent protection on its own top drug, the antidepressant Effexor XR, Krensavage said it has no other major patent expirations in coming years.

"Hopefully, biologics from Wyeth would give Pfizer a more sustainable revenue base because these products tend to provide evergreen sales," he said, noting the lack in the United States of a pathway for generic versions of biotech medicines.

Krensavage estimated Wyeth shares are worth $51 each, given the value of the drugmaker's marketed products and assets, whereas a $60 billion deal would value them at only $45.

"Wyeth is cheap enough so that the downside for Pfizer is not too steep," he said.

(Editing by Gerald E. McCormick)