BioWorld Today Columnist

We're barely out of January, and we've probably already seen the biggest biotech acquisition of 2009 - Pfizer's $68 billion bid to buy out Wyeth.

Oh, sure, Wyeth is a big pharma company, with the antidepressant Effexor the largest grossing name on its marquee. But it makes the majority of its revenue from nontraditional drug products, notably vaccines and biologics. It has a history of engagement with biotechnology that, until recently, Pfizer largely lacked . . . and that is what makes this deal, and what may follow, more interesting than "just another" big pharma merger.

Called American Home Products until 2002, Wyeth took a deep dive into biologics back in 1992 with the acquisition of a majority interest in Genetics Institute. In 1994 it became a major vaccine player through the acquisition of American Cyanamid and its subsidiary Lederle Labs. Lederle was, in turn, the majority owner of Immunex, developer of the rheumatoid arthritis blockbuster Enbrel, one of Wyeth's biggest revenue drivers to this day.

Pfizer's tie-up with Wyeth has caused a fair bit of grumbling about Pfizer just doing "more of the same" - addressing its problems through mega-mergers that boost revenues and offer some cost-cutting synergies but do little to address the core problems of productivity and long-term growth. Add to that the fact that past mega-mergers - Warner-Lambert in 2000 and Pharmacia in 2002 - were too expensive, poorly managed and coincided with the massive loss of shareholder value that marked former CEO Hank McKinnell's tenure, one can understand a certain lack of enthusiasm. Indeed, considering that the stock of both Wyeth and Pfizer has dropped - significantly, in Pfizer's case - following the announcement, it appeared that investors view this match-up as a major destruction of shareholder value.

Then there's the fact that at least on the surface, Wyeth merely mirrors Pfizer's biggest problems. Wyeth's biggest product, Effexor, will see sales erode in the face of generic competition in the next couple years, as will its heartburn drug Protonix, aligning with the same bleak period in which Pfizer will see key products, including the all-important Lipitor, go off patent. "Misery loves company" isn't usually a solid basis for a merger proposal.

And finally there's the fallout to consider, particular for those of us in the biotech industry. A boa constrictor in the process of digesting a pony is not going to be on the hunt for quite some time, and that could be a loss to all those biotechs hungry to win acquisition or partnership dollars from a shrinking number of pharma companies. (Already, the Netherland's Crucell, previously in acquisition talks with Wyeth, is a casualty of the deal.) In fact, that may be the biggest beef out there: Pfizer is using almost all of its cash horde - some $23 billion - along with stock and debt, all roughly equal portions, to secure Wyeth. Gone with that cash, it seems, will be what many (myself included) view as a historic opportunity to get biotech assets on the cheap. After all, $68 billion could have bought some really interesting products, patents, platforms and pipelines across the sector.

And Why It Makes Cents

These are all legitimate gripes, but here's why I think this may not be such a bad move for Pfizer. First of all, the company isn't overpaying for a change. Wyeth may not be exactly cheap at $68 billion, but the roughly 15 percent premium to the stock price at the time of the offer is a far cry from the 34 percent premium offered for Warner-Lambert (at a time when the stock market was at its peak, moreover), or the 44 percent premium for Pharmacia. At 2.5 times trailing sales and 17 times trailing free cash flow, Wyeth is at least not being offered an outrageous valuation, particularly if Pfizer can effectively offset future generic competition through cost cutting and growth of key products like Prevnar.

Second, Pfizer can pay off its debt pretty quickly if it wants to. Wyeth comes with about $2.7 billion in cash net of debt, and Pfizer almost certainly will be forced to sell off some assets to meet antitrust concerns, raising more cash. If it decides it wants to stay out of the consumer health business, for instance, selling off Wyeth's brands, which include Advil, Robitussin and ChapStick, could make up that deficit in a hurry.

So even if Pfizer is merely putting off the inevitable day of reckoning by increasing its scale, it's at least picked a reasonable strategy for doing so.

But history's verdict will be based more on what follows. Is this just another relatively gutless move in an era where pharma has been far too conservative, risk averse and unwilling to make the big changes necessary to flourish long-term? It all depends on Act 2. Within 18 months of the acquisition, Pfizer could have its debt well under control, be rapidly rebuilding its cash horde (thanks in part to a slashed dividend), and looking to put its new assets to use.

One of the reasons Pfizer has avoided major biotech acquisitions in the past is that it doesn't necessarily have the internal R&D expertise or the manufacturing capability to make the most of them - and that will change with the Wyeth acquisition. If Wyeth becomes step one in Pfizer's transition toward aggressive biotech R&D, it could turn out to be a savvy move. After all, many biotechs don't have much manufacturing capacity, and when a partner can't offer that either, deciding how to scale up becomes a major risk management issue - one that Pfizer now will have a far better handle on.

The second step could be breaking up the company into smaller, more focused R&D units that compete internally, along the lines of what GlaxoSmithKline has proposed, or perhaps something even more decentralized. A huge merger with a major pharma company may seem like an odd way to start on the "small-is-beautiful" path, but if Pfizer wants to create focused R&D units and rely less on the scattershot product-by-product approach that has not worked so well in the recent past, it makes sense to first gain more internal expertise in biologics.

Will these things actually happen? It's too soon to say, of course, but Pfizer CEO Jeff Kindler opened a recent luncheon with investors by stating: "An acquisition should be in pursuit of a strategy." Right now management is focusing on the not-insignificant synergies between the two companies, but a broader strategy of pursuing biologics may have Pfizer out shopping again sooner than some might think.