Pfizer-Wyeth merger may lead to re-rating of entity

They are currently among the cheapest MNC pharma stocks and trade at a discount to larger peers

Wednesday’s rally in the share prices of Wyeth and Pfizer, the Indian subsidiaries of the respective US pharma majors, could be a precursor to the eventual re-rating of the merged entity. Wyeth shot up 20 per cent to hit the upper circuit as soon as the merger plan was announced, while Pfizer hit a fresh 52-week high, closing the day with gains of 5.2 per cent. The respective boards of directors of the two companies will meet on November 23 over the merger.

These two are among the cheapest MNC pharma stocks on the bourses and trade at a discount to larger peers such as GSK Pharma, Abbott India and Sanofi India on valuation metrics such as price-to-earnings multiple and price-to-book value. Given the difference in size and their current valuation, the upside is likely to be greater for Wyeth shareholders from the current level. “Size provides advantages such as greater bargaining power with the trade channel and ability to better leverage the distribution network,” says Saion Mukherjee, pharmaceutical analyst for the India market at Nomura.

If the proposed merger goes through, it will create India’s third largest pharma company in the multinational category behind Abbott and GlaxoSmithKline (GSK) Pharma, with annualised revenues of Rs 1,800 crore. For the year ended September, Pfizer reported net sales of Rs 986 crore, while Wyeth's revenues were Rs 673 crore. GSK Pharma reported revenues of Rs 2,600 crore during the period. Unlike their Indian-owned peers, MNCs focus largely on the domestic market and as such are valued differently. On a standalone basis, Pfizer is currently the 10th largest drug maker in the domestic market, with market share of 2.4 per cent, according to data by IMS Health for August this year. Wyeth doesn’t figure in the top 10.

Analysts expect the merged entity to attract a higher valuation than currently enjoyed by Pfizer and Wyeth individually. “Bigger companies always enjoy a premium over smaller peers, given their ability to churn out higher profitability. The market sees a similar opportunity here but I would wait for details before advising investors to commit money,” says Alex Mathews, head of research at Geojit BNP Paribas Financial Services.