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Pfizer, Inc.
What Does a PFE-PHA Merger Mean?

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By WCMinor
July 15, 2002

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PFE Fools,

I was surprised by the news of PFE's planned purchase of PHA because they were already the biggest kid on the pharma block and their rivals in bigness (GSK and MRK) have not found that size in itself works to their advantage. I still haven't recovered from my shock but I'm already speculating away about what this means for those involved and for us investors:

1. PFE does not buy companies, it buys products and pipelines. In this case Celebrex and probably Bextra are the main inducements, although Pharmacia also has some nice ophthalmic products if I remember correctly. If I were working for Pharmacia I would start polishing my resume right now because Pfizer takes over companies like the Borg would: you are assimilated or destroyed (and there was probably more destruction than assimilation for the employees of WLA).

2. Look for some confusing earnings comparisons from PFE for the next 2-3 years. The WLA merger took 3 years if you look at significant charges and benefits to the bottom line. PHA is a lot smaller but I expect we are in for some difficult comparisons going forward. What do I mean by difficult? I still expect PFE to report about 15% earnings growth for the next 3 years but with the merger that is more likely to be pro-forma; we may be asked to look beyond some one-time charges to see the growth. However, on balance PFE created some real earnings growth by consolidation after the WLA merger and I suspect they will do the same here (which, again, is why PHA employees should dust off those resumes).

3. Unfortunately this adds a distraction to PFE's senior management across the board. It is more difficult to run your current R&D programs if you have to spend time in meetings on merging your R&D with an acquiree and the same will be true for PFE's marketing, regulatory affairs, basic research and every other organization. I haven't figured out if the merger is initially dilutive to earnings or not but for this reason alone a dip in the current PFE stock price would not be unreasonable.

4. There may be some regulatory strife over this merger. PFE was already very big and was not shy about objecting to what it perceived were unfair moves by regulators. Pharmacia, although originally based in Europe, has essentially become a US company but there may be some objections to the merger from Europe, where governments negotiate directly with companies to set drug prices and so have a stake in keeping companies weak. I think there is a small but real chance this merger will not get the necessary approvals.

5. I have already seen talk of Monsanto being spun-off to shareholders. I expect this merger to accelerate PFE's interest in getting rid of non-pharmaceutical products it acquired from WLA. PFE has an interest in human pharmaceuticals because of their superior margins and everything else (including, I would argue, veterinary products) is a distraction they can ill-afford given their size and the need to consolidate operations.

6. This puts PFE one step closer to becoming the "world's most valued company" and helps clarify that they are referring to stock market valuation.

WCMinor
Long PFE and not too anxious to add to my position at the moment


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