As Big Pharma companies lose share to generics, Wall St.’s theory is that they should buy smaller companies that are developing new, hot drugs. If Big Pharma can’t fill its pipeline through R&D alone, perhaps it can buy pipelines of new drugs by snapping up a few firms with promising products.
But, if Pfizer (PFE), Merck (MRK), and Wyeth (WYE) are going to see revenue shift to generic manufacturers as their drugs come "off patent" why not buy generics companies to get some of the benefit of the shifting revenue.
Take Teva (TEVA), a large generics company. It has a market cap of $26 billion. It stock is fairly low now at under $35. Pfizer has a market cap of $194 billion. It trades at 3.7 times sales. Teva trades at 3.5x.
Over the last year, Pfizer’s stock has actually outperformed Teva’s. But, that may not continue. With flattening revenue and job cuts of 10,000 people, Pfizer is admitting its has significant problems.
If the revenue is moving to generic drug companies, Big Pharma should own some of that revenue. If you can’t beat them, buy them.
Douglas A McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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