The best minds on Wall Street like Pfizer’s $68 billion acquisition of Wyeth. Last week, to take just one example, a prominent firm (which advised Pfizer on the merger) said it believes its client is poised for a revival once it has Wyeth drugs in its pipeline.Yesterday, Merck took a page from the same play book, buying Schering-Plough for $41 billion.

For Wall Street, the logic is simple: Pulling two ocean tankers is easier than pulling one. This is not because the investment bankers have been in the water trying to tow one of the big ships with their own strength. Rather, the financial community has access to top-secret calculators and advanced investment algorithms.

We don’t have access to those calculators. But we wonder about the math of this year’s mega-mergers. Pfizer plans to hack $4 billion in redundant costs out of its operations to justify the deal. Merck will shave $3.5 billion. That’s all on the table now. What is under-appreciated, however, is the magnitude of what they will have to do with fewer people in the lab, in the clinic and in the market place.

Bizarre Math

Once the dust settles, we suspect the acquisitions will paradoxically make it harder to move the revenue needle for the largest firms. Not easier. The financial types are assuming that the ocean tankers’ engines can be tuned, that special navigational techniques will be deployed. Which sounds great. Except that no firm in the industry has shown that science and clinical development can scale at this level. Hasn’t been done.

Just as departing executives always promise to spend more time with family, drug companies always vow they won’t reduce R&D spending. Until they do. Pfizer closed a sprawling campus in Ann Arbor. There are other examples from other firms. Science will be trimmed as a result of the big deals. It’s unavoidable. Getting more results out of fewer people will be tricky.

Wall Ahead

Beyond that, we are scratching our heads over whether the financial community has considered other factors. We’re thinking of a) inevitable new inefficiencies that flourish in the governance of all large companies; b) unwritten regulatory obstacles at FDA in the post-Vioxx, post-Avandia era; c) generic versions of biotechnology products, which President Barack Obama favors and d) special limiting factors that apply to the largest life science companies as they scramble to find patients and investigators all over the world. In brief, we question if there will be enough validated, promising compounds to test, not to mention patients to try them on.

We ran some numbers of our own. In two years, Lipitor will have lost patent protection. Thousands of people who formerly worked at Wyeth will be unemployed or at new jobs. Pfizer at that stage, very conservatively, might have $60 billion in revenue. We also assumed that the company wanted to grow its revenue at a rate of 5 percent a year.


Incremental Revenue Pfizer Will Need Annually

Using cautious estimates, Pfizer will need, in the next few years, more than $6 billion annually in new products. But because all of us are hearing about trillions in the news so often, that may not seem like much. 

So, as a service to readers, we clicked around and assembled our own little table. Pfizer-Wyeth needs to find a daunting number of new products and run a sobering number of trials. On the positive side, we assumed there would be no transformative scientific discovery or technical breakthrough that accelerated the drug development process—at Pfizer or anywhere else. We assumed that at the end of the day, a Democratic Congress and president working on health care “reform” will make noise and dramatic, eloquent speeches, but not have the political strength to change the existing regulatory landscape or reimbursement methods.

On the negative side, we were equally neutral, assuming no major drug safety issues or international controversies that might trigger a new backlash against the industry or, say, a major motion picture trashing pharma. 

Future Reckoning

Even so, thousands of clinical trials will be needed to find $6 billion or $7 billion annually in additional revenue. It works out to delivering three or four new Viagras year after year. Indefinitely. Is that plausible? If Pfizer’s labs couldn’t generate that before the company bought Wyeth, why will the future be different? Our spreadsheet has a blank cell for that question.

We intend no knock on Pfizer, Wyeth, Merck, Schering-Plough or any other company that is acquiring or being acquired. We do question whether the math is grounded in reality. The implied level of future clinical productivity at Pfizer seems implausible.

It pains us to say it, but there is an industry-wide risk here. The largest firms in the pharmaceutical industry could soon resemble lumbering titans like GM and Citigroup. Adding weight for the sake of weight is appropriate in sumo wrestler training. It has not been a viable strategy in any other industry. After the merger, Pfizer will be about twice the size of GlaxoSmithKline and roughly comparable to Johnson & Johnson. Merck will have two-thirds as much revenue as its larger competitors.

What Whales Need

We have no idea how the mega-deals will unfold. Could they prove to be astute in a few years? Yes. Could the deals implode? Yes. At that stage, we doubt U.S. bailout money would ever be available for drug companies, although states like Pennsylvania and New Jersey might beg for it.

Other endings and reckonings are also possible. One scenario for drug companies unable to grow organically is to ... acquire even larger competitors. Could Pfizer buy GSK or Novartis? Don’t just stop at roping together two supertankers. Tie together five or six. Why not? The investment bankers will love that idea.

Or it could go the other way. The money for pharmaceutical acquisitions could dry up. Investors could give up, just as they have on banks and car companies. And some new management team at a big pharma might have to reluctantly announce the breakup of the company into a few large parts. Until then, it will be interesting to see how big the largest drug companies can become and still be effective.