NSU

Huizenga School of Business

Law and Ethics Classes

Case Study

Pfizer – Wyeth 2009 Pharmaceutical Merger

Prepared by Professor F. Cavico

In January of 2009, Pfizer, the number one pharmaceutical company in the world, announced that it planned to buy its competitor number 12, Wyeth, for $68 billion. The cash and stock merger is one of the largest in the pharmaceutical industry. It is expected to be effectuated later in the year. Pfizer will pay $50.19 a share for the company - $33 in cash and 0.985 Pfizer shares worth $17.19 a share at the time of the agreement, which amounts to a 15% premium.

The New York Times that the merger was unusual since it was not one like the banking and finance mergers “orchestrated” by the government, and also that this large merger would be the first big one backed by Wall Street in recent months. Even though credit has been very tight recently, the Times noted that five banks had agreed to lend Pfizer $25 billion to pay for the merger. Pfizer’s merger bid, the Times noted, is being financed by four banks that received bailout money from the federal government – Bank of American, Citigroup, JP Morgan – Chase, and Goldman Sachs. Pfizer, which has $26 billion in cash and “equivalents,” plans to finance the remainder of the merger through a combination of cash and stock. The boards of directors of both companies have already agreed to the merger as well as for the price of the buyout. The Times also noted that Pfizer appears to be taking advantage of the current bad credit market in order to buy Wyeth for a lower price that it might obtain if competing bids were made, which experts do not believe will occur. Moreover, not everyone can get capital and financing today, including very large global companies.

The merger will immediately increase Pfizer’s revenues and profit, and transform the drug company into a gigantic, yet more diversified one, that will be less dependent on the production, marketing, and sale of certain well known and very popular drugs. As one industry expert noted on CNN.Money.com Pfizer needed to “expand their portfolio” by making a major purchase. So, by buying Wyeth, Pfizer will change from a producer of drugs to a maker of vaccines, biotech drugs, more traditional drugs, and non-prescription products for both people and animals. Wyeth makes and sells Centrum vitamins, the anti-depressant Effexor, and the biotech arthritis drug Enbrel. It also plans to introduce a new form of the drug, Prevnar, which combats blood infections and meningitis. The sales from Prevnar totaled $2.1 billion in 2008. The combined drug giant is expected to have revenues of $20 billion a year. Pfizer faces what the New York Times called a “historic run of 14 patent expirations through 2014, which would add up to lost revenue of $35 billion” when those drugs are replaced by cheaper generics. Pfizer’s competitors, Merck, Bristol-Myers-Squibb, and Eli Lilly are also facing their own material patent losses over the next five years. Pfizer also related that it would increase its focus on treatments for Alzheimer’s disease, pain, psychosis, and cancer, and it would continue its focus on vaccines and biotechnology.

Pfizer has recently suffered a 90% drop in income, a very low profit forecast for 2009, and 8000 job cuts that have already begun. One big problem for Pfizer is that it is expected to lose $13 billion a year in revenues from the sale of its anti-cholesterol drug Lipitor, starting in 2011 when that drug confronts generic competition. Pfizer’s profit was also diminished materially by a legal settlement of $2.3 billion over allegations that it marketed its pain reliever drug Bextra and possibly other products for indications that had not yet been approved by the government. Pfizer earned $268 million or 4 cents a share, compared with profit of $2.72 billion or 40 cents a share, the year before. Revenue fell 4% to $12.35 billion from $12.87 billion. Wyeth’s fourth quarter profit decreased 5.6%, to $960.4 million, or 71 cents a share, down from $1.02 billion, or 75 cents a share, in the 2007 quarter. The Pfizer board of directors has also decided to cut the company’s quarterly dividend in half to 16 cents a share.

Investors appeared to approve the deal, at least initially, as Wyeth’s shares went up 12.6% after the merger talks were reported, and Pfizer’s shares rose 1.4%. The two companies’ shareholders as well as government regulators still have to approve the deal.

Pfizer currently has 81,900 employees; and Wyeth has 50,000. It is expected that the merged company will undergo a staff reduction of about 15% of the combined companies’ workforce, which is about 20,000 employees. Pfizer has already eliminated 8000 employees and has closed five manufacturing plants. Pfizer also said it was cutting up to 8% of its research staff, or up to 800 jobs. Wyeth’s management team is expected to depart after the merger is effectuated. The New York Times noted that the two companies have “enough overlap” so that they can achieve considerable cost savings through consolidation and eliminating duplicate operations and personnel. Pfizer expects to save $4 billion annually by merging with Wyeth.

The Pfizer-Wyeth merger was the first large merger since the AT&T-Bell South merger of 2006. The New York Times noted that if the deal goes through, it would demonstrate to many people that Wall Street is willing to lend again, at least to the nation’s largest companies with good credit ratings.

Bibliography: Johnson, Linda A., “Pfizer swallows up rival drug company,” Miami Herald, January 27, 2009, p. 3C; Smith, Aaron, “Pfizer to buy Wyeth for $68 billion,” CNNMoney.com, http://money.cnn.com/2009/01/26/news/companies/pfizer_wyeth, retrieved January 28, 2009; Sorkin, Andrew Ross, and Wilson, Duff, “Merger Near For Pfizer and Wyeth,” New York Times, January 26, 2009, pp. B1, B7; Sorkin, Andrew Ross, and Wilson,

Duff. “Pfizer on verge of buying drugmaker Wyeth,” New York Times, http://www.sfgate.com/cgi-bin/article, retrieved January 28, 2009.

Questions for Discussion:

1. Is the proposed merger legal pursuant to anti-trust merger and monopoly law? Why or why not?

2. Is the proposed merger moral pursuant to Utilitarian ethics? Why or why not?

3. Is it moral pursuant to Kantian ethics? Why or why not?

4. Does it pass the test of Value Driven Management? Why or why not?

5. What should a “socially responsible” merged pharmaceutical company be doing for society? Explain, citing examples.