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Last updated: January 23, 2009 7:16 pm

Pfizer/Wyeth

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Perhaps third time will be the charm for Pfizer. The fact that shares of the world’s largest drugmaker fell only modestly after reports that it was in talks to buy rival Wyeth for $60bn was a sign that, while no panacea, investors think the deal will do no harm to the patient.

Pfizer’s two other big acquisitions in the past decade proved to be short-term palliatives at best. Buying Warner-Lambert in 2000 gave it full control of blockbuster Lipitor, but at too high a price. Pfizer has shed two-thirds of its value since that deal. The purchase of Pharmacia in 2003 destroyed even more value after its blockbuster pain-reliever Celebrex suffered from safety concerns.

Buying Wyeth does not directly address Pfizer’s biggest worry, a looming plunge in revenue. Cholesterol drug Lipitor, accounting for a quarter of revenues, loses exclusivity in late 2011, while Wyeth’s anti-depressant Effexor, accounting for 17 per cent of sales, expires next year.

In spite of their shared woes, though, a Pfizer-Wyeth combination does not equate to two drowning men grabbing on to each other. More than most businesses, pharmaceuticals mergers can result in large and rapid cost savings. And, even with such “patent cliffs”, a combined company’s future revenue could be less lumpy.

Given the choice of buying potential growth in a biotechnology deal and partially insulating itself for some lean years by absorbing Wyeth, the latter seems more sensible. Another unpalatable option is to eschew a big deal and start throwing off cash beyond its 7.6 per cent dividend yield. Barring an unforeseen fiasco such as Celebrex, at least Pfizer does not appear to be overpaying. And, given Wyeth’s depressed share price, Pfizer can still extract value by paying partly in cash. Wyeth is clearly no miracle drug. But Pfizer is buying time until it can cure what ails it.

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