If the rumors are correct, Pfizer would shell out more than $25 billion, based on Sanofi's current $121 billion market cap, to buy that chunk of shares from French energy conglomerate Total and cosmetics maker L'Oreal.
It's gotta do something
Pfizer will be on the ropes in the coming years, as its top line takes a multibillion-dollar hit from continuing worldwide patent expirations for its lead drug Lipitor.
Last year, sales of Lipitor were nearly $13 billion, accounting for 29% of Pfizer's pharmaceutical revenue. But thanks to generic competition from similar compounds like Merck's (NYSE: MRK ) Zocor, Lipitor sales have already started declining in 2007 -- and much faster than Pfizer expected. In the second quarter alone, sales of Lipitor fell more than $400 million (13%) year over year.
As Lipitor sales plunge, other top drugs -- like the nearly $5 billion-a-year hypertension treatment Norvasc -- now face generic competition, too. And sales from Pfizer's $1.6 billion-a-year antihistamine Zyrtec are about to start evaporating in 2007. Even before Lipitor's U.S. patents begin to expire in 2010, Pfizer's top-line growth is already stuck in a rut.
To combat this drain on its net income, Pfizer has been cutting costs as much as possible. In its most recent quarter, it accrued a whopping $1 billion in restructuring charges.
In the near future, Pfizer will get no relief from its drug pipeline, either. Inhalable insulin drug Exubera, developed by Nektar Therapeutics (Nasdaq: NKTR ) and marketed by Pfizer, seems to be a marketing failure; few insurance companies will cover its high costs. Pfizer's recent approval of the first of a new class of HIV treatments, Selzentry, may help a little, but the drug's restrictive label and efficacy in only a portion of patients will likely keep it a niche product.
At the start of 2007, Pfizer had eight compounds in phase 3 development; four of them were new indications for already-approved drugs. The remaining four are admittedly exciting new molecular entities, but most are cancer-targeting drugs that face a very competitive oncology market. They won't even come close to replacing the billions of dollars Pfizer will soon lose to generic competition.
Trying for a comeback
Pfizer's last weapon to stabilize its deteriorating top line is its net cash and investments of roughly $11 billion (minus long-term debt and pension and retirement benefits owed).
If Pfizer does purchase a 23% stake in Sanofi, it would become that company's most influential shareholder, since Total and L'Oreal's holdings account for roughly a 37% share of voting rights. If the deal goes through, it would make sense for Pfizer to simply grab the remaining shares and become a majority shareholder.
But buying a stake in Sanofi won't make Pfizer's financial health or future any brighter. Pfizer would have to take on debt to finance the deal, and Sanofi will likely face the same generic-competition problems as Pfizer, as early as this year.
The patents on Sanofi's top-selling drug, the thrombosis treatment Lovenox, were deemed invalid earlier this year in a U.S court. Generic-drug makers like Momenta Pharmaceuticals (Nasdaq: MNTA ) , Teva (Nasdaq: TEVA ) , and Watson Pharmaceuticals (NYSE: WPI ) are all waiting for the FDA to approve their generic versions of Lovenox.
Taking a large stake in a drugmaker with the same oncoming generic problems, and the same potentially huge hit to its top line, wouldn't much help Pfizer. Instead, Pfizer needs to grow its drug pipeline by leveraging its cash to buy up or partner with small Rule-Breaking specialty pharmas working on novel drug targets, like Panacos Pharmaceuticals or SGX Pharmaceuticals.
Remember, all this talk about a Pfizer stake in Sanofi is merely speculation. Total's CEO has publicly stated that Pfizer hasn't contacted the company about buying its Sanofi shares. Pfizer still faces rough times ahead, no matter what. But for the sake of its future, the reported lack of interest in any Sanofi purchase is likely a good thing.