Pfizer (NYSE:PFE) and Wyeth’s Indian subsidiaries recently got board approval for a merger which will create the ninth largest pharmaceutical entity in the country. The two subsidiaries have long had significant stakes in each other and given the increasing competition from generics, a merger appears to be a logical option. The big pharmaceutical firms are facing difficulties due to multiple major drug patent expiries and declining R&D (research and development) productivity. The growth in the developed markets is likely to slow down and Pfizer needs to tap the emerging market potential where lifestyle related illnesses are on a rise due to growing urban populations. India, in particular, offers tremendous growth opportunity as the country’s pharmaceutical industry is expected to hit $55 billion in annual sales by 2020, up from $12.6 billion in 2009. 
Under the merger, Wyeth’s shareholders will get 7 Pfizer shares for every 10 Wyeth shares they hold. This will require Wyeth to issue additional 15.6 million shares  The combined entity will have a stronger market position and lower business risk. Our price estimate for Pfizer stands at 33.90, implying a premium of less than 5% to the market price.
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Why Is India Important For Pfizer?
The Indian pharmaceutical market is poised for strong growth. The continued growth in the population, which is already the second largest in the world, and an increase in the patient pool will drive the market. More patients will be able to afford medicines due to rising income and increasing insurance coverage. According to consulting firm McKinsey, nearly 650 million Indians will have health insurance by 2020 due the growth in private insurance and government sponsored programs.  As a result, the overall market will increase almost four-fold between 2009 and 2020.
In addition to this, the disease profile in India is changing towards chronic conditions. The chart to the left shows how the proportion of chronic illnesses such as heart disease, cancer, diabetes and muscoloskeletal disease has increased, while the figure for acute infections has come down significantly. This shift in the disease profile has resulted from an increase in affluence, higher life expectancy and the onset of lifestyle related conditions. India currently has the highest number of diabetic patients in the world, and the figure is expected to reach 73.5 million in 2025 according to estimates from consulting firm PWC.
This bodes well for Pfizer, as these are some of the biggest drug categories for the company. The chronic nature of these illnesses implies long term treatment, thus ensuring repeated drug sales. For Pfizer, the therapeutic areas of carodiovascular diseases, oncology (cancer related), central nervous system and musculoskeletal system account for roughly half of the company’s value according to our estimates. Diabetes and cancer therapeutics represent some of the most promising areas for Pfizer and other big pharmaceutical companies. Having a large patient pool in India and emerging markets, along with strong local market presence, will help Pfizer drive profitability and recover the cost of R&D activity directed towards these therapeutic areas.
Pfizer’s annual revenues from India stand at around Rs1,156 crore, implying roughly $187 million at the current exchange rate.  That’s less than 1% of the company’s global revenues indicating tough competition from generic manufacturers in the country. Although the opportunity is big, Pfizer will need differential pricing for its patented drugs to gain share locally. The region’s contribution to the company’s value is likely to remain low for the foreseeable future.
Our price estimate for Pfizer stands at $33.90, implying a premium of less than 5% to the market price.