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Pfizer and Merck: Were the Acquisitions Worth It?

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The Big Pharma companies reported earnings that beat the Street, but profits were greatly hindered by the behemoth acquisitions they made in 2009.

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It's now 2010, but the major consolidation of the pharmaceutical industry seems like it happened yesterday. Pfizer (PFE) and Merck (MRK) are certainly still dealing with the aftermath of the massive acquisitions that they each made in 2009.

Layoffs and plant closures have become a way of life for employees at these two gigantic companies -- Merck recently announced that it's phasing out three of its New Jersey locations (mostly former Schering-Plough facilities) and Pfizer has laid off workers in most of its facilities.

Both companies reported earnings on Tuesday that beat the Street's estimates, but profits were sorely damaged by restructuring charges related to the 2009 acquisitions.

Pfizer reported earnings of 25 cents per share, or $2.03 billion, compared with $2.73 billion, or 40 cents a share, in the year-prior period. Excluding items related to the company's $68 billion acquisition of Wyeth that closed in October and health-care reform charges, Pfizer had earnings of 60 cents per share. Analysts surveyed by Thomson Reuters had expected, on average, earnings of 53 cents per share on revenues of $16.58 billion. Analysts' forecasts usually exclude one-time charges.

Meanwhile, Merck reported earnings that fell 79% in the first quarter to $298.8 million, or 9 cents a share, on charges from its $41 billion purchase of Schering-Plough. Earnings excluding charges from the acquisition and the health-care reform changes, were 83 cents per share, topping analyst estimates by 8 cents per share. Merck's materials and production costs were $5.2 billion during the quarter, compared to $1.3 billion for the year-prior period. The quarter included $2.3 billion of additional costs related to accounting costs for the merger.

Despite both companies' profits falling due to massive restructuring efforts, revenues were an entirely different story.

Pfizer's revenues increased 54% to $16.8 billion, with $5.3 billion, or 48%, coming from Wyeth contributions. Wyeth's top product, the rheumatoid arthritis drug Enbrel, had sales of $802 million, while sales of Pfizer's cholesterol drug Lipitor were up 1% to $2.76 billion. Lipitor is expected to lose patent protection in 2012 -- leaving a hole in Pfizer's income statement. The Big Pharma is hoping that the Wyeth acquisition will hopefully offset some of that. Yet, sales from Lipitor are worth more than half of the revenues that were produced by all Wyeth's drugs combined.

But some analysts are bullish on the prospects of the behemoth company. "The combined PFE-WYE entity enjoys improved long-term strategic positioning due to a more sustainable business mix across small molecule therapeutics, vaccines & biologics, nutritionals, consumer, animal health, and generics," said Leerink Swann analyst Seamus Fernandez.

On the other hand, Merck more than doubled its revenues, bringing in $11.4 billion, compared with $5.4 billion in the year prior. Sales of Merck's diabetes drugs Januvia and Janumet increased 32% to $712 million, while the HPV vaccine Gardasil had sales of $233 million, up 11%. All three drugs were previously owned by Merck before the acquisition. Sales of the cholesterol drugs Zetia and Vytorin were $1 billion; Merck previously shared revenues on the drugs with Schering.

"We believe Merck's acquisition of Schering-Plough lowers Merck's risk profile while expanding the pipeline and the diversity of its health-care portfolio. We believe near-term risks are largely factored into Merck's current valuation," added Fernandez.

Merck says it's on par to have $3.5 billion in cost savings from the acquisition in 2012.

It's hard to tell how effective both acquisitions will be in the long-run in patching up the companies' damaged pipelines, but investors seemed pleased so far. Both stocks are up slightly today, even as the overall market is down considerably.
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No positions in stocks mentioned.

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