Why Merger Of Giants Could Help Pharmaceutical ETFs

What is a beaten-down global drug industry that has been hit by flagging product development and high fixed costs doing to restructure and regain strength and  what effect will this have on exchange traded funds (ETFs)?

Expirations Threat. One idea that has been thrown around is a potential merger between pharmaceutical giants Pfizer (PFE) and Wyeth (WYE).  Both companies are facing expirations of patents of their most lucrative drugs, intense competition by generic drug makers and increased regulatory standards by the FDA, states Matthew Karnitschnig and Jonathan D. Rockoff of the wall Street Journal.

Cost Savings. This merger makes sense because it will enable the giants to save billions in research and development, back office and sales and manufacturing costs.  On the other hand, it still doesn’t solve the industry’s problem of developing new drugs.

Complementary Products. Pfizer is not new to the concept of growing via acquisitions and Wyeth offers products and businesses that complement Pfizer’s lineup, especially Wyeth’s biotech exposure through Prevanar.  Exposure to the biotech industry will allow the drug makers to develop, produce and bring new drugs to the market.

More Power. In the absence of mergers and acquisitions, pharmaceutical companies have been cutting costs by slashing sales jobs, but this hasn’t been enough.  Hopefully, by stepping up to the plate and combining operations, the industry will be able to cut costs in such a way to make it the stock-market star that was in the 1990s and early 2000s.

Pharmaceutical HOLDRs (PPH): down 0.3% over the last month; Pfizer is 16.4%

iShares DJ U.S. Pharmaceuticals (IHE): up 0.8% over the last month; Pfizer is 7.7% and Wyeth is 5.7%

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