"Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished."
- Barack Obama, January 20, 2009
This was Obama's claim.
But it's not what the lawyer running Pfizer thinks. Nor the guys at the financial institutions. Nor, apparently, the reporters supposedly "covering" the pharmaceutical or finance industries.
As some may have noticed, there was a rumor (actually a recurring rumor) reported on the front page of the Wall Street Journal Friday that Pfizer is in talks to acquire Wyeth for about $60 bn.
No one who understands the pharmaceutical industry, or really understands financial markets, thinks that this is a value-creating move that will create brighter growth prospects for either company - even though many "analysts" are already endorsing the deal as a great move.
Instead, it's a move that will probably result in 15,000 - 20,000 layoffs (including thousands of scientists) and will accelerate the elimination of pharmaceutical R&D capacity, while most likely costing Pfizer shareholders $ billions of dollars.
More broadly, Pfizer chasing Wyeth is, in fact, a lens through which one can see just how broken our entire financial, legal, research and healthcare systems have become in the Reagan-Bush era of lax regulation and ruthless greed.
What Say the "Experts?"
I fished around a bit yesterday and found some articles evaluating the deal.
Here's an excerpt of one from Forbes:
Analysts say that the pharmaceutical giant has to do something to ease the pressure, either via a mega-merger or through a bevy of smaller deals. "Buying another company ... may be the only realistic solution for Pfizer," Tim Anderson of Sanford C. Bernstein wrote in a research note.
What an idiot.
As if the slow-motion accounting shell game of a merger - "look ma, the combined revenues are bigger than Pfizer had before!" (duh!) - fundamentally changes the fact that Pfizer shareholders are almost certainly overpaying for those "cash flows," and almost guaranteed to be worse off "at the end of the day."
Why? Because Pfizer has become perhaps the world's foremost destroyer of "shareholder value." Over the course of two previous acquisitions - Warner Lambert and Pharmacia (both of which looked more promising than a Wyeth acquisition, by the way) - the price of Pfizer's stock has fallen more than 50%.
That's more than $150 billion in market cap up in smoke. Poof! That puts the Pfizer guys in the same league as the bankers and the Bushies.
(And to be sure, Pfizer is not alone - most mergers and acquisitions seem to "destroy value. But I digress.)
The analysts probably even know that they're spewing crap about this merger "looking good." But where's the incentive for these people, making 7-figure salaries and desperate for something to write about in their "notes", to knock a move that at least makes it look like someone is doing something in this brain-dead and dying industry?
I thought an anonymous commenter on the WSJ health blog nailed it:
I don’t get it. Why do the investment analysts and business journalists go along with this sham? The previous mergers have not worked in providing value to the shareholders as other posters have noted. The analyst and journalist should be screaming against this merger if they were true to the principles of long term growth and value. There seems to be a conspiracy of idiots looking to make a quick dollar.
Comment by Anonymous - January 23, 2009 at 12:23 pm
Whatever Happened to Pfizer?
How did Pfizer, once one of the world's most admired pharmaceutical companies turn into the foremost rogue black hole of the pharma industry - sucking in other pharma companies and destroying them?
At bottom, Pfizer's problem is that it was taken over by lawyers and marketers. The current CEO is the former chief counsel for McDonalds. Think about that for a minute.
At the turn of the century, Pfizer believed that its secret strength was its ability to integrate superior marketing acumen into the prioritization of development programs, the design of clinical trials, and the promotion of drugs to doctors and patients.
Next thing you know, they were dumping $ billions into Viagra and Zoloft ads, and hiring hundreds of ex-cheerleaders into their physician-focused sales force. They shifted massive R&D resources into marketing-oriented trials for Lipitor, patent-extension plays (e.g., dubious combo drugs and extended release versions of drugs that offered little clinical value over the previous versions), and "me-too" drugs (like Celebrex).
At one point, it even looked like Pfizer was deprioritizing cancer research - because those drugs couldn't become $ billion dollar franchises. Not to fear though: when it became clear that other pharma companies could get away with mind-blowingly aggressive pricing on oncology drugs - turning drugs that treat only a few thousand patients into $ billion dollar blockbusters - Pfizer apparently switched gears. (This kind of pricing and reimbursement problem, by the way, will ultimately be one of the forces that blows up Medicare.)
Back in the early 2000s, the Bush FDA was approving practically any drug with a name, so the future looked golden.
Want Fries with That?
Then came the swoon. First there was Merck's Vioxx debacle - triggering a long, slow retrenchment at FDA. Huh. Maybe its not good for the industry to have the FDA approve every crap compound they review.
Suddenly presumed sure-fire drugs saw their prospects diminish dramatically (e.g., for Pfizer, "Oporia").
Plus it turned out that the marketing geniuses weren't such geniuses after all. Pfizer's inhaled insulin, Exubera, launched and then withdrawn about a year later, is perhaps the biggest bust in pharma history.
Still, they had Lipitor, and with all those massive post-marketing trials managed to turn that drug into a franchise that generates something like $13 billion a year with something like 90%+ net margins. (You're reading that right - the actual cost to manufacture all the Lipitor sold around the world is probably on the order of $1 billion; the rest is all potential profit - though several $ billion goes to hire sales reps, to pay for commercials, and to provide "consulting fees" to doctors - and a little bit even goes back into R&D).
In 2011, Lipitor loses patent exclusivity. Generic versions of Lipitor will likely take about 95% of the market within 12 months of that event (saving payers, of which the Federal Government is the biggest, at least $10 billion a year).
So, for Pfizer, the biggest cash cow is about to vanish - though the cumulative gusher has created a mountain of money in the bank account.
Meanwhile, the pipeline is pretty much empty.
What's a Huge Pharma Company to Do?
If the system were working, Pfizer would use that cash to refill its pipeline - buying or licensing the rights to promising early-stage compounds. Or maybe the legions of scientists could be working on internal projects on the cutting edge of medicine.
Ah, but they can't do that. They don't have clear intellectual property ("IP") rights for the majority of things they might focus on. It used to be that government funding led to important breakthroughs at places like universities. University scientists would then publish findings in leading journals, which competing teams of scientists at different pharma companies would leverage in creating drugs - making a ton of money for shareholders in the process, but fundamentally advancing medicine.
Nowadays, however, the guys getting the government funding try to patent every chemical they can think of that has anything to do with their research (including the targets themselves), and keep their findings as secret as possible for as long as possible.
They then try to out-license their IP to the big companies one-by-one, for huge sums, and even arguably skew subsequent research to try and keep the gravy trains going. One clear effect is to slow down the pace of scientific advances.
The big pharma companies have little idea how to effectively evaluate competing opportunities, and variously blow big dollars in wasted ventures or suffer severe paralysis.
So increasingly the pharma companies steer their "research" money, instead, to university research on already approved compounds - leading to phenomena like the recent explosion in the number of little kids being treated with antipsychotics.
If you cry one more time junior... that does it! Honey, get the Geodon!
Forward Ho!
Tedious details aside, at Pfizer, the lawyers and marketers at the top have apparently decided that they just can't do the science stuff that well anymore. So they want to reduce the science investment, and just get their hands on new products that can leverage that good old marketing brilliance.
And while they're at it, how about snagging some of those new-fangled biologics?
Those are great, right? Biotech revolution? Human genome sequencing and everything? Or something?
Wyeth is loaded with them, right?
Yes, Wyeth is loaded with biologics. Biologics like Premarin - a hormone analog pill they have been manufacturing from horse urine (yes, horse urine) since the 1960s.
Biologics like Prevnar, a vaccine. Vaccines being a technology that actually dates back to the 1700s.
Wyeth, for its part, has managed to convince the leading lights of the financial analyst community that old products like Premarin and old technologies like vaccines are really "biotech" products - making Wyeth sound like a sexy biotech target.
The one legitimate "biotech" product Wyeth seems to have is Enbrel - a $20,000 a year injectable treatment for rheumatoid arthritis - which is really an Amgen product that Wyeth only co-markets. So Pfizer buying Wyeth brings only (apparently) some marketing rights, not any R&D competencies. (But, again, who needs R&D, really?)
Because it's an injectable, Enbrel will have some defense against competitors even after its patent expires. How much depends on the biosimilar legislation Congress is likely to pass this year. Pfizer, in chasing Wyeth, is implicitly betting that Enbrel will continue to command huge pricing premiums (it probably costs something like $3000 - $4000 to manufacture a year's supply) even after "biosimilar" versions of Enbrel come out.
So now Pfizer apparently hopes to buy Wyeth. Yay rah boom. It will make Pfizer revenues look bigger, pleasing the leeches in the analyst community and the slack-jawed yokels managing the cash for institutional investors.
And history has taught Pfizer managers that, despite the massive price tag, in the longer run they can screw up massively (i.e., the $150+ billion and counting in destroyed shareholder value) without any real consequences.
Clearly fundamental problems in modern corporate governance, massive "principal-agent" problems, and excessive focus on near-term stock prices - counting on people to forget the longer-term trend - are driving a lot of this idiocy.
But what would you do if you were a McDonald's lawyer in over your head who's run a major pharmaceutical company into the ground? Kindler and friends are beseiged by investment bankers and management consultants presenting tightly-packaged, half-ass ideas. And clearly he has to do s-o-m-e-t-h-i-n-g - the Lipitor cliff!
So maybe buy Wyeth. Its a smarter move than, say, going hunting with Dick Cheney.
To be sure, in the process of shutting down all the Wyeth facilities and laying off 15,000 - 20,000 people (with Pennsylvania and New Jersey probably especially hard hit), Pfizer will give senior Wyeth executives nice golden parachutes. It's only common courtesy, executive-to-executive, after all.
Will the Last One to Leave the Lab Turn out the Lights?
President Obama suggested on Tuesday that our capacity to innovate remains undiminished. I don't think that's true. The bulk of US innovation in the past decade appears to have occurred in variations on bogus financial instruments, and in the concoction of outrageous ponzi schemes.
Meanwhile, as marketers, financial whizzes, and patent attorneys slowly crushed the life out of our world-class research labs - and out of our world-class scientists - many of our brightest students in younger generations deployed a cold-eyed calculus to abandon science and engineering and pursue easy $ millions on Wall Street or in "hedge funds" (i.e., legalized gambling).
Not a good outcome for society.
We woke up last year to the reality that most of the US economic growth over the last decade has been pure illusion, amounting to little more than a zero-sum transfer from the many struggling to get by to the few super-rich.
Meanwhile, our infrastructure for real innovation - that drives real economic growth - and in the pharmaceutical area can make a real difference in people's lives - has been badly battered, twisted, and atrophied.
And its not just pharma - many elements of this decline echo loudly across the empty corridors in other industries - think electronics or automotive - that the US broadly dominated in the 20th century through the consistent introduction of innovative products.
And after Pfizer buys Wyeth (assuming that the gravitational force of the black hole proves irresistible) and empties out all Wyeth's labs - and another half of its own labs - our capacity to innovate (however its been misdirected of late) will be that much smaller and that much weaker.
Dozens of programs will be abandoned. No drugs will be closer to approval. Thousands of fed-up scientists will likely abandon the industry.
Enbrel commercials may get a little bit snappier. The sales reps will be hotter.
And the bottom line: Pfizer pursuing "it's only option" will look like a great deal to Wall Street.
At least until the next round, probably circa 2012, by which time Pfizer's stock price will be in the single digits.
Which brings us back to what I think is the most profound question posed by the Obama transition:
Was the Bush Administration, with its myriad failings in every policy and regulatory sphere, the disease -- or really only just a symptom of something bigger, and worse?
UPDATE
According to this morning's paper, the acquisition is looking increasingly certain.
The FTC or the Obama Administration should block it. Letting Pfizer gobble up and pulverize another competitor is bad for the pharmaceutical industry, bad for medicine, bad for the US economy, and bad for taxpayers.
Whether such a merger is allowed to go through will be another early test of whether meaningful change has really come to America.