Why Pfizer's Better Off Without Ratiopharm

It was in, then it was out, then back in. The news rumors over Pfizer's (NYSE: PFE) potential acquisition of German generic-drug maker Ratiopharm have flip-flopped as often as Jim Cramer changes his mind about a stock.

Pfizer may have been in till the end, but its bid to push farther into the generic-drug business with one large acquisition won't happen. Teva Pharmaceuticals (Nasdaq: TEVA) outbid Pfizer, walking off with the spoils for a cool 3.625 billion euro (about $4.95 billion).

At 2.15 times 2009 sales, the price is lower than what competitors like Mylan (Nasdaq: MYL) and Novartis (NYSE: NVS) paid for purchases, and considerably lower than what Teva paid for Barr a few years ago. Of course, not all deals are the same -- Barr has a nice portfolio of branded products, for instance. Furthermore, the German market where Ratiopharm has a large presence is highly competitive, which likely pushes down prices and profit. Unfortunately, Ratiopharm isn't a public company, so we can't analyze the deal based on profits. However, Teva did say that it expects to see about $400 million in synergies, and that the deal would add to profits within three quarters of closing.

That lack of synergies will be Pfizer's greatest hurdle in making a big push into generics. Unless Pfizer wants to overpay, it's at a disadvantage against large generic-drug companies, who are better able to offer higher deal prices simply because of their ability to cut costs as they combine.

Pfizer's best bet could be to buy a generic-drug company like Stada, with a presence in developing countries. Other large pharmas like GlaxoSmithKline (NYSE: GSK) and sanofi-aventis (NYSE: SNY) have taken that route, which should help them seek out some additional profits from their off-patent drugs.

While it would have been nice to diversify into generics, Pfizer's investors shouldn't at all be disappointed by today's news. It's better to have lusted and lost than to have overpaid and won.