Speculation about a Pfizer Inc. deal for Wyeth, first reported in Friday's Wall Street Journal, raises an age-old question that applies to more than just the pharmaceutical industry: size, its merits and demerits. Over the past decade or so, Pfizer has steadily built itself through
acquisitions into a behemoth, and the Wyeth deal would push it to $75
billion in revenues. The argument for consolidation and great size has
several parts, some obvious, some not.
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Pfizer has been buying not just scale, but product lines that it had not been able to develop internally. Scale gave it massive cash flows, which fed both vast marketing operations and huge R&D and regulatory operations. Acquisitions like Pharmacia (or the mooted Wyeth) also allowed then-current management to rev up a mature and enormous corporation through a cost-cutting cycle and exploit new products long enough to get themselves happily retired. And the comp, based on that deal-related growth and a rising share price, was pleasant enough for them to take on the risks of integration.
The downside to continuing consolidation is pretty striking as well. The growth is, in some sense, artificial and short-term. Once costs are eliminated and new products begin to peter out, the company is left with an even bigger problem. It grows ever harder to generate growth when the size gets so large, and it takes radical cutting of the kind no pharma has really undergone (though it's much discussed) to slim down by selling assets. The underlying problem as always is the lack of productivity from R&D -- at least the lack of productivity relative to the company's size. Now, of course, hope springs eternal, particularly when it comes to R&D.
There is also a good argument (though difficult to prove) that scaling up R&D to a size necessary to move a big pharma is a game of diminishing returns. That, in turn, helps explain why pharmas are so eager to gobble up the best of the biotechs (see Roche Holdings AG and Genentech Inc.), although again, greater scale requires the existence of an ever-larger and highly productive biotech establishment, which in turn relies upon the health of venture capital and an IPO market. But if biotechs grow significantly more productive than pharmas -- and there's a loose financing climate, which doesn't exist right now -- why wouldn't they try to go it alone, like Amgen Inc.?
Pfizer chasing Wyeth looks like a medium-term answer to a chronic long-term problem that will only grow worse -- unless Pfizer suddenly turns into a new-product juggernaut. But this isn't just about pharmas. The instinctual drive in many industries is toward scale and heft. But the problems of managing ever-larger, ever-more-complex aggregations never really go away, at least in industries that are not driven by economies of scale. As we've seen in one universal bank after another -- hello Citigroup Inc. -- managing that mess, squeezing out steady growth, grows more and more difficult; and the temptation is to reach for risk to generate necessary returns. The real question to ask about any of these aggregations is the long-term one: Will size provide the ability to grow organically faster after the cost cutting is done, or is this just a dealmaking strategy to be repeated again and again? Too often the answer is the latter: Dealmaking is a short-term expedience waiting for a long-term miracle. - Robert Teitelman
Robert Teitelman is the editor in chief of The Deal.
Comments
And most important thnig is Pfizer is acquiring Wyeth with Wyeth's own extra cash.
I dont understand one thing how the govt. of America allow such a deal. Where two good companies are going to be one with lots of debts and laying off 40,000 employees just for few exe management benifits. Short term solution of one company exe managment problems.