In the next few years, many blockbuster drugs are going off-patent, which has led pharmaceutical giants to rush to make strategic deals in their quest for new drugs. Pfizer (NYSE:PFE) is one of the most noteworthy examples with its $68 billion acquisition of Wyeth in 2009. However, the first and most important question to ask is whether these major acquisitions are able to create shareholder value in the long term.

For example, when we think about Lipitor, we think of the more than $100 billion in revenues the drug has brought the company. However, interestingly enough it doesn’t appear to have created much shareholder value since Pfizer bought Warner-Lambert in June 2000, mainly to gain access to Lipitor. Before we get into dissecting all the pros and cons related to the “strategic decision”, we’ll get into details of Lipitor and its effect on Pfizer’s ability to generate shareholder value.

See our complete analysis for Pfizer Here

Pfizer spent $114 billion to acquire Warner-Lambert, while Lipitor has generated more than $120 billion in revenues to date and we don’t expect this figure to rise significantly following the drug’s patent expiry last November. Meanwhile, there is a sales force of thousands of drug representatives supporting promotional activities for Lipitor, in addition to IT, marketing and potential litigation costs. Some back of the envelope math will tell you that the biggest drug in the history of pharmaceutical industry did little to generate shareholder value. Since Jan 1, 2001, Pfizer’s stock price has declined nearly 50% while the S&P 500 has gained about 1.6%.^[1]

Now, lets take a quick look at Pfizer’s perceived brand value. Interbrand, the world’s leading brand consultancy ranked Pfizer at No.30 in 2001, with a brand value of nearly $9 billion.^[2] Fast forward to 2011, Pfizer doesn’t even make it to the Top 100 list, for the fifth consecutive year. ((2011 Ranking of the Top 100 Brands, Interbrand))

Blockbuster drugs sometimes result into lack of risk diversification as corporate resources are inefficiently allocated. It creates confusion and distraction, inadvertently or otherwise as everybody gets hooked to the massive cash generating product. Pfizer made the same mistake to to favor its poster child Lipitor. In last couple of years, the company brought few drugs to market with huge potential as R&D investments on other drugs were reduced. Now that Lipitor has lost its patent exclusivity, top brass is worrying about the next Lipitor to offset the revenue loss.

Our opinion is that acquisitions should fund innovation and not replace them. Moreover, with personalized and targeted medicines being the order of the day, clinical studies and trials seem to be one area where pharmaceutical giants should spend more. Another lesson, classic end of life-cycle management to protect Lipitor’s revenues especially in the first 180 days after patent expiration.^[3]

We believe there is a lot of scope for innovative drugs to achieve phenomenal success specially in fields like Alzheimer’s, Cancer and Obesity. Without these strategic decisions, it might not be possible for another drug company to match the scale of pharmaceutical giants. To support Lipitor, Pfizer conducted nearly 400 clinical trials covering 80,000 patients^[4] Therefore, acquisitions could help these companies in creating more blockbuster drugs, if executed well. Hopefully, Pfizer has learnt its lessons from Lipitor, because merely spending $68 billion on another Warner-Lambert (sorry, Wyeth) does not guarantee shareholder value creation.

Our price estimate for Pfizer stands at $25, implying a premium of 10% to the current market price.

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