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Pfizer & Merck Mega Mergers Disappoint

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Investors applaud the cuts and buyback at Pfizer, but what about growth? All eyes are on new Merck CEO Frazier on Thursday.

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The headlines following Pfizer's (PFE) earnings touted research and development cuts and a big stock buyback. So much for growth from a broad portfolio of new products.

A little more than two years ago, Pfizer's then-CEO Jeffrey Kindler insisted his company's just-announced $68 billion takeover of Wyeth wasn't just about cost cutting. Rather, "it's about creating a broad, diversified portfolio," he told a press conference.

More than 15 months after consummating that deal, Wall Street wants Pfizer to get smaller rather than bigger. Some analysts say they think new CEO Ian Read will spin off big chunks of the company. Read reinforced that notion on Tuesday.

"We expect to complete our ongoing review of the composition of our business portfolio to determine the optimal mix of businesses that we can appropriately fund and manage in order to achieve consistent growth and maximum return on investment," Read said.

Goldman Sachs analyst Jami Rubin recommends buying Pfizer but only because she says she views the sum of the parts as greater than the whole. She hopes Read, who is firing more than 2,000 researchers to save money, is going to steer Pfizer into a new direction.

Bigger is not always better in the drug business. Pfizer increased its R&D spending 20% to $9.4 billion last year but has little to show for its efforts. There are no big, new products to replacing aging blockbusters.

"The industry status quo of sinking billions of dollars into R&D and getting bigger via M&A has not worked," Rubin says in a note. "Pfizer could lead the way to a re-think of the sector if its potential spin-offs were to lead to a massive portfolio restructuring."

Pfizer and other big pharmaceutical companies have to do something. Generic competition eats into Pfizer's sales. Revenue from its biggest drug, Lipitor, fell 6% to $10.7 billion last year.

On Thursday, all eyes will be on rival Merck (MRK), which -- like Pfizer -- pulled off a huge takeover itself in late '09, buying rival Schering-Plough. Merck will report fourth-quarter and full-year earnings tomorrow.

Like Read, new CEO Kenneth Frazier will be in the spotlight as investors look for him to set the tone for the coming year.

"He's on the clock now," says Christopher Bowe, US health care analyst for Informa-Scrip Intelligence. "People will look to him for any signs that he's taking steps to change the company, put his stamp on it and state his long-term vision."

Investors also will be anxious to hear about Merck's progress in developing new drugs such as hepatitis C treatment boceprevir. That drug is in a race to market with smaller company Vertex Pharmaceuticals (VRTX).

Like Pfizer, Merck has struggled in the new-products department. Investors' hopes for a potential blockbuster from experimental blood-thinning drug vorapaxar took a hit last month when the company said it will no longer evaluate the treatment in people who had strokes. That announcement was interpreted as meaning the drug may serve a smaller patient population (if it's approved at all).

Vorapaxar was considered one of the most promising products Merck acquired in its $41 billion takeover of Schering. Doh!

The Schering merger may, in fact, result in the loss of valuable sales for Merck. Johnson & Johnson (JNJ) argued that a change in control ended a marketing partnership it had with Schering for two blockbuster biotech treatments, Remicade and Simponi, for inflammatory diseases such as rheumatoid arthritis. The dispute is in arbitration and a J&J win would cost Merck billions.

Shares of both Pfizer and Merck performed poorly in the past year. Merck shares dropped 15% over the past 12 months, trading at $33.62 midday Wednesday and Pfizer fell almost 1% to $18.85. Go back further, and it's an even more distressing story. Both stocks lost about 57% of their value in the past 10 years.

Pfizer's stock perked up a little yesterday. It wasn't on encouraging product news. Investors lauded Read's proposed cuts and a potential $5 billion in share repurchases. Maybe growth is overrated.

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No positions in stocks mentioned.
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