Faith slipping in meaningful Pfizer deal

By Ransdell Pierson and Jessica Hall

NEW YORK/PHILADELPHIA (Reuters) - As proposed buyouts sweep through the drug sector, Pfizer's failure in recent years to buy another big rival has surprised many investors, some of whom say its too late for a big acquisition to rescue the No. 1 drugmaker.

Investors had long expected Pfizer to acquire another large drugmaker or sizable biotechnology companies to gain rights to new medicines before it loses U.S. patent protection on its Lipitor cholesterol fighter in 2011.

"The hole created by generic forms of Lipitor will be so gapingly big that it's hard to argue convincingly for an acquisition," said Scott Richter, a portfolio manager with Fifth Third Asset Management. He noted that other Pfizer drugs will also lose patent protection soon after Lipitor.

The company, which rakes in $13 billion a year for Lipitor, also badly needs new products to offset sales declines for drugs already facing generic competition.

Pfizer, which became the industry leader by buying Pharmacia Corp and Warner-Lambert Corp over the past decade, is trading at 11-year-lows because its laboratories have failed to produce important drugs. Pfizer edged up 1 cent to $19.85 on the New York Stock Exchange on Monday.

Richter said other drugmakers are facing similar problems, including a poor record of developing new drugs or getting them approved. "So Wall Street would be super-skeptical about the success of bringing two problem children together."

Moreover, Richter said, Pfizer would probably need to repatriate many billions of dollars in overseas profits to finance a big deal. That would greatly raise its tax rate, he cautioned.

Pfizer's inaction has been underscored in recent weeks by Roche Holding AG's (ROG.VX) $44 billion offer for all outstanding shares of its U.S. partner, Genentech Inc DNA.N, and Bristol-Myers Squibb Co's (BMY.N) $4.5 billion bid for cancer-drug partner ImClone Systems Inc IMCL.O.

"Business development continues to be a focus and is part of all of our revenue growth strategies," Pfizer said in a statement. "We continue to be selective and diligent on the assets we pursue, which is essential to any successful business development effort."

The company said it has been focusing on deals in the past 18 months, including a global licensing deal in April with Avant Immunotherapeutics Inc AVAN.O for a promising brain cancer treatment in mid-stage trials. "These strategic deals add depth to our pipeline and the potential for new, innovative medicines," Pfizer said.

Pfizer, with annual revenue of about $48 billion and a market capitalization of $130 billion, would need to buy a company with enough revenue "to move the needle," said Chris Armbruster, an analyst with Al Frank Asset Management.

Armbruster said suitors that might make sense are Wyeth WYE.N and Biogen Idec Inc (BIIB.O) because of their ample size and focus on lucrative biologics -- medicines made in living cells that narrowly target disease-causing proteins.

But Wyeth and Biogen, with market capitalizations of $57 billion and $15 billion, respectively, are grappling with big recent setbacks for their medicines.

"Pfizer can fine-tune their focus and make focused acquisitions, but it would be hard to imagine a massive, transformational deal," said one investment banker who asked not be named.

"Pfizer hasn't done anything wrong; it's not like they missed this great 'aha!' moment," the banker said. "It's just a long, slow process changing a company of this size in this market."

Another investment banker expressed doubt that mergers and acquisitions would turn the tide for Pfizer.

"Given their size, they can make any number of small acquisitions but that still won't make a meaningful difference to their bottom line and research and development pipeline," the banker said.

"There's not one magic answer for them. It's not like they missed doing that one step that would have made all the difference. They are so big and so complicated that there's no easy solution."

Jay Markowitz, a research analyst at T. Rowe Price Associates, said it will be very hard for Pfizer to deal with Lipitor's downturn. "How do you replace $12 billion in revenue?" he said.

Although big merger deals can provide cost savings and other benefits in the short term, he said they typically destroy shareholder value.

Instead of going that route, he recommended that Pfizer focus instead on "beating the bushes" to acquire small and mid-size companies, or promising individual drugs.

He suggested that Pfizer acquire more medicines in mid-stage trials -- a point where they are more expensive than untested early-stage drugs but far less costly than drugs that have already proven their worth in bigger studies.

"There is a reluctance to make bets on compounds that still have clinical risks," Markowitz said.

(Additional reporting by Lewis Krauskopf in New York, editing by Richard Chang)