Pfizer Feeds Its Drug Habit

When it comes to drug companies, bigger may be better.

By John Simons
 
Fortune, July 23, 2002

While Wall Street wants to break conglomerates into smithereens, the pharmaceuticals business is heading in the opposite direction. If approved, Pfizer's $60 billion purchase of Pharmacia will create the world's largest drug firm, with $48 billion in annual revenue and $9.2 billion in profits. Pfizer (which swallowed Warner-Lambert two years ago) will be 50% bigger than its nearest competitor, GlaxoSmithKline. Which raises the question, When it comes to drugs, is bigger necessarily better?

In the short term, definitely. The Pharmacia deal reportedly allows Pfizer to save $2.5 billion over the next four years while helping it maintain double-digit revenue growth through 2004. The company's storied 13,000-person sales force now has more to hawk on calls, and Pfizer has more drugs to fill its pipeline.

That's why this deal will likely force others to follow suit. Most speculation centers on joining Merck and Schering-Plough, because the two have teamed up on cholesterol drug Zetia, due to be released next year. (Merck executives deny merger speculation.) Other market watchers are whispering about a GlaxoSmithKline/Bristol-Myers combination; and Eli Lilly may be a target too.

The problem with the bigger-is-better approach is that it doesn't solve--or even address--the industry's legendary problems: patent challenges from generic drugmakers, political pressure to keep prices low, skyrocketing research costs, and most important, a dearth of novel medicines. A company that's twice as big simply has to discover twice the amount of new medicines. "You can drive short-term earnings growth with a merger," says Joseph Zammit-Lucia, president of Cambridge Pharma Consultancy, "but in terms of sustained growth, nothing is going to do it like new products."