I have spent the last two decades working in and around the pharmaceutical industry. Having now spent the last year focusing on the worsening financial and economic conditions in the U.S. and globally, it is fascinating to see the latest useless combination of one tired pharmaceutical giant with another dovetail unexpectedly with the financial crisis.
To wit, the leaks the last few days were correct: Pfizer has agreed to purchase the former American Home Products, now called Wyeth, which got smart years ago and saw that better living through chemistry would make its shareholders richer than pots and pans could. And so it came to pass. After all, purchasing products for the kitchen lacked a direct subsidy, but drug benefits provided by employers - now there's an opportunity to jack up profit margins. This mid-course corporate life change was brilliant and has now been definitely rewarded. While matters are less clear from Pfizer's standpoint, what appears likely is that the U.S. taxpayer is indirectly subsidizing future massive layoffs in one of the "green" knowledge-based industries that we need to encourage, having just subsidized the preservation of jobs in the U.S. auto industry that has fought greenness in every way it can.
Please see the press release, "PFIZER TO ACQUIRE WYETH, CREATING THE WORLD'S PREMIER BIOPHARMACEUTICAL COMPANY" for Pfizer's take on things.
Here's my take. I'll get to the tie-in to the financial mess and TARP in points 3, 4 and especially 5.
1. Buried in the press release is the fact that Pfizer is cutting its dividend in half.
2. It is well-known in the pharmaceutical industry that Pfizer functions like the military- with unbelievable rigidity; but without the operational flexibility that battlefield commanders in the military have; and with the same creativity of the French military in preparing for WW II; and without the capacity to learn from its mistakes. That said, Pfizer has the gall to trumpet the concept that this already-stultified company will become flexible- think pre-pubescent Chinese gymnasts:
"Unique and Flexible Business Model Features Focus and Agility of Smaller Enterprises Backed by Resources and Scale of Global Company".
Excuse me. I'm going to take a 5 minute break and decide whether to have a good belly laugh or vomit.
3. (I'm back. I'll keep you in suspense as to what I did.) The press release again:
"Combination Strengthens Platform for Improved, Consistent, and Stable Earnings Growth and Sustainable Shareholder Value"
However, here's Bloomberg's take on how Pfizer can struggle to keep earnings from declining, forget about growing earnings:
"The Wyeth transaction . . . could keep Pfizer’s earnings unchanged at $2.69 a share from 2010 to 2015, when patents expire on some of Pfizer’s biggest products, Anderson (a Sanford C. Bernstein analyst) said in his report. That compares to a 68 percent drop without the acquisition, to $1.40 in 2015."
"To achieve that, Pfizer would need to cut 70 percent of Wyeth’s research, marketing and administrative costs, Anderson said."
So Pfizer is going to put most of Wyeth out of business. Heck, Wyeth could have done that today on its own and basically become a free cash flow machine.
(My non-cynical take is that Big Pharma should cancel 100% of its research into new chemical entities. It should outsource all of it to those that really know how to do it, such as small companies; academia; and, surprisingly, government, which has a major public policy interest in success. Let Big Pharma stick to what it is good at, which is convincing doctors to prescribe expensive new drugs to patients, whether or not those new drugs have any advantage over others that are available for much less cost in generic form; and doing clinical trials of a drug that has already been discovered.)
4. Bloomberg again:
"Pfizer also will halve its quarterly dividend to 16 cents a share, fire 10 percent of the pre-merged workforce, or about 8,000 people, and close five factories."
In other words, Pfizer is shrinking along with cutting its dividend. Note the term "pre-merged" (I can't call it a word, as I can't find it in an on-line dictionary). The press release also ignores the fact that Pfizer has sunk so far in its own estimation of its own industry's growth prospects that has let it be known that it is now also a full-fledged generic drugs company.
5. Bloomberg once more:
"Among the banks advising Pfizer and arranging a loan package to finance part of the purchase price are Bank of America Corp., Barclays Plc, Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co., said people with knowledge of those banks’ roles."
So here's the bottom line. The taxpayer has kept BofA, Citigroup, Goldman Sachs and JP Morgan alive with TARP money and other goodies. Now these same firms are going ahead and "arranging a loan package" that will keep Pfizer's earnings up (maybe) with mass layoffs in a transaction so large that it will of necessity be anti-competitive even if OK with Justice (which it will be).
These companies have no shame.
They will finance a mammoth deal such as this takeover that will destroy lots of jobs so that Pfizer can perhaps one day boast about raising its dividend (ignoring that it has been halved), but they won't get serious about keeping people who purchased toxic mortgage products from them or their brethren stay in the homes they never could afford.
These financial institutions deserve the death sentence if they can't support themselves absent government largesse.
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