Wyeth Offers Limited Upside

We currently rate shares of Wyeth (WYE) a Hold with a $49 price target. Our target assumes Pfizer Inc. (PFE - Analyst Report) shares trade up near $16 (currently $13.49) by the expected close date in the third or fourth quarter. At an exchange ratio of 0.985 and combined with the $33 cash per Wyeth share, this equates to roughly $49 per share.

Revenue in 2008 grew 2% and was up 1% excluding the benefit from foreign exchange. EPS was flat from 2007 on lower interest income and a higher tax rate, partially offset by lower SG&A spend. Fourth quarter results disappointed due to softness in a number of products and a foreign exchange headwind.

The global economic weakness appears to be taking a toll on sales of a number of Wyeth's pharmaceutical products as well as the consumer business. We model flat sales and EPS growth in 2009. The company continues to contend with significant pipeline and regulatory setbacks that will constrain longer-term growth.

While the company has recently had some pipeline successes, we don't believe there's enough in the form of new products and expanding indications to make up for the pipeline failures and the influx of generic competition. We expect the net result to be zero revenue and EPS growth from 2008 to 2012.

The recently implemented Project Impact is expected to shed headcount by about 6%, and should moderate some of the gross margin contraction from generic competition to Protonix, Effexor, Zosyn (expected in 2009), and Effexor XR (expected July 2010). The next wave of sustainable positive revenue growth should materialize in 2013 when new products such as Pristiq, Torisel, Viviant/Aprela and Relistor begin to make meaningful sales contributions.

Upside could come from a favorable ruling on the Protonix patent, but that's now been pushed back to the fourth quarter of 2009. And while bapineuzumab offers huge upside to the current share price if approved, based on the less-than-convincing phase II trial data and recent safety concerns in the non-ApoE4-carrier cohorts, we remain skeptical that it will ever make it to market and don't model any sales for the drug.

Meanwhile, it appears Pfizer has locked up financing to acquire Wyeth, and we expect the merger to close in the third or fourth quarter of this year. We maintain our Hold rating with a $49 price target which implies Pfizer's shares trade up near $16 at close of the acquisition.