Pfizer’s Breakup Options Shift Even With AstraZeneca Bid

Since Ian Read became Pfizer Inc.’s leader, he’s shed two non-drug businesses, reorganized the company into three separate units and pursued the largest merger in the history of the pharmaceutical industry.

Now, even with AstraZeneca Plc (AZN) in his sights as a takeover target, Read said he could theoretically see a time in the future when Pfizer splits into two parts to boost investor value, potentially making a proposed mega-company short lived.

“We’re not talking about a three or four-way split, we’re talking about two major segments,” said Read, 60, a native of Scotland who started his career at Pfizer as an accountant and became chief executive officer in 2010,

Pfizer never really thought of itself as three businesses, Read said on a conference call with investors and analysts today. It’s a shift from last year, when the company began dividing the company into three units, each with its own leader. Read emphasized he’s made no decision about a breakup.

Pfizer shares fell 2.6 percent to $29.96 at the close in New York. The stock had gained 3.5 percent in the last 12 months, the worst performance of any major brand drugmaker on the Standard & Poor’s 500 Pharmaceutical Index of 13 companies.

Pfizer last week offered about $106 billion to buy AstraZeneca Plc, a bid that was promptly dismissed by the London-based company. Along with the lower tax rate linked to AstraZeneca’s U.K. base, Read has said the acquisition would give New York-based Pfizer a promising new generation of experimental cancer drugs that use the body’s own immune system to attack the disease.

Seeking Efficiency

Being bigger would also help Pfizer be more efficient, strengthen it in key drug development areas, and give the company more leverage against the governments and insurers buying its products, he said during the call.

“Immune-oncology is exciting, it’s something to hang your hat on. But the tax stuff and the synergies are really where this lies,” said Judson Clark, an analyst with Edward Jones & Co. based in Des Peres, Missouri.

The deal to buy AstraZeneca is being looked at closely by the U.K. government, over concerns it could reduce British pharmaceutical industry jobs.

So far, it hasn’t attracted nearly the same level of scrutiny in the U.S., where Read has said Pfizer will largely keep its operating headquarters even as it moves its legal residence to the U.K. for the lower tax rate. “We clearly will stay with a massive presence in the U.S. with a combined company,” he said.

Read declined to say when or if Pfizer might take its case directly to AstraZeneca shareholders in a hostile takeover attempt, though he hinted they might.

‘Considering Options’

“We are very disappointed with their unwillingness to engage in conversations and believe it is in the best interests of both companies and AstraZeneca and Pfizer shareholders that we pursue a friendly negotiated transaction,” Read said. “We are considering our options on how we progress these discussions.”

Two units inside Pfizer makes more sense than three, with half the company focused on brand-name drugs while the other part focuses on older products, Clark said.

“It calls in the question why restructure into three unit instead of two in the first place,” Clark said by telephone. “They’re tacking a bit more toward the center if they do acquire AstraZeneca.”

Read’s comment followed a first-quarter report in which the company’s profit beat analysts estimates while revenue fell short of analyst expectations.

Estimates Beat

Earnings excluding one-time items were 57 cents a share, 2 cents above the average of 12 estimates compiled by Bloomberg. Revenue fell 9 percent to $11.4 billion as foreign exchange rates reduced sales by 3 percent, the company said in a statement today. Analysts expected $12.1 billion.

“Overall, a weak quarter with disappointing revenues,” said Timothy Anderson, an analyst with Sanford C. Bernstein & Co., who called it a “low-quality” beat of earnings estimates.

First-quarter net income fell 15 percent to $2.33 billion, or 36 cents, from $2.75 billion, or 38 cents, the company said. Pfizer said it would change its full-year earnings outlook, though wasn’t permitted to do so now because of rules surrounding its offer to buy the U.K. drugmaker.

Pfizer for the first time broke out separate financial results for the three units. Total first-quarter drug sales fell 9 percent to $10.5 billion from a year earlier. Sales of Prevnar, Pfizer’s pneumonia vaccine, were little changed at $927 million. Viagra, a pill for erectile dysfunction, had sales that dropped 19 percent to $374 million.

The quarter’s results were helped by a 11 percent reduction in cost of sales, which fell to $2.05 billion. Administrative expenses declined 6 percent to $3.04 billion, and research-and-development spending decreased 5 percent to $1.62 billion.

To contact the reporter on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net Bruce Rule

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