Steven Pearlstein writes to oppose a proposed merger between drug giants Pfizer and Wyeth link here. His grounds are that the industry has been merging to stay profitable through the establishment of product monopolies rather than competing to produce new and better products. The whole point of drug patents is to foster innovation, so Pearlstein is dead right, though as he implies, rather late in the day after the growth of conglomerates has already sharply reduced competition.

I won't dispute Pearlstein's thesis. My belief, however, is that the real lesson here is that both the management of Pfizer and those commenting on the merger are failing to think "outside the box". They continue to think of "growth" as requiring the acquisition of other companies even though their products may be "stale". This seems to be a failed strategy.

With patents expiring Pfizer should begin to think of itself as selling (generic drugs) a commodity like Coke. Also, I believe, if done correctly they could be using the free cash flow to buy Pfizer stock to enhance shareholder value. Basically, this amounts to downsizing, but I guess downsizing is considered UN-American in our ego driven world.

The proposed acquisition of Wyeth by Pfizer seems to be another example of our corporate managers basically selling out the shareholders so that they can pat themselves on the back for making this "deal" and paying themselves a huge bonus. The stock of Pfizer responded to the proposed acquisition by continuing to fall.

When you look at the details, such as the breakup fee, bank fees, and paying the Wyeth stockholders a premium for their stock, Pfizer management does not appear to be working for the Pfizer shareholders. It almost seems to rise to the level of a give-away where Wyeth snookered Pfizer management.

Steve:

The pharmaceutical industry is quite bizarre. They lived through two decades of high profits and appear to have become addicted to them. Unfortunately, their inventive output has declined over the last decade and a half and the bulk of high-profit patented drugs are on the cusp of expiring. In any other industry, the research and development department would be brewing up something new and different. Pharmaceutical response: If we are unable to be inventive, buy someone else.

Most other manufacturing industries realize that to stay in business for decades requires continuous innovation or invention or you go out of business. I personally am fine with the mergers, because you can only merge so far before you have to do something new. I do not think Pfizer can compete with Teva and the other generic houses; they have been so insulated from real competition for so long that they have forgotten what it is. The only conclusion is that either Pfizer needs to become a lot more inventive (or maybe innovative), or Pfizer needs to downsize, a lot, a process they have already started. Buying other companies only delays the inevitable.

I can't disagree with anything you said. Especially the conclusion that buying other companies (or providing bailouts, GM for example) only delays the inevitable. The purchase of Wyeth or the bailout of GM simply entrenches management in the mistaken belief that they are on the-right-tract.

Given that, I would think that Pfizer (if it can't innovate) could even pursue a bold strategy of to selling everything and paying-off the shareholders!! Alas we have moronic managers who just want to protect themselves rather than the shareholders they are supposed to be serving.

Steve:

Yep to everything you said. However, I suspect that Pfizer will drag things out for as long as possible. Someone there may wake up one day and realize they have to try something different, or they will just slowly, agonizingly, fade away...

Steven Pearlstein is a dishonest and corrupt writer. In my personal experience with the man, I learned he received bribes from agents of the Federal Trade Commission to write false and misleading articles about targets of federal antitrust (specifically anti-merger) investigations. His word should never be cited by any person seeking to make credible arguments.

Maybe they've decided to become "too big to be allowed to fail", so they'll qualify for government bailouts too. That would explain the merger.