Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Pfizer seems obsessed with taxes.

It tried, and rather spectacularly failed, to complete two tax-inverting megamergers with AstraZeneca PLC and Allergan PLC. And now -- under growing pressure to do another deal -- the company is blaming taxes for its unwillingness to do so.

On Pfizer's second-quarter earnings call, CEO Ian Read responded to M&A questions from analysts by saying the firm wanted to wait out "short term events" such as U.S. tax reform, which could change asset values, before doing deals. 

But as Pfizer reported sales that missed analyst expectations, it was clear its need for a deal will only increase with time. And its arguments for holding out aren't particularly convincing. 

Lagging
Pfizer shares have fallen well behind those of other large pharma peers in recent months
Source: Bloomberg

Pfizer has consistent problems: too many old and declining products, too few new and growing ones, and an often-disappointing pipeline.

Its breast-cancer drug Ibrance is growing at a rapid clip. But a Novartis AG competitor recently hit the market, and another may arrive soon from Eli Lilly & Co. Sales of Pfizer's best-selling medicine, the vaccine Prevnar, have clearly peaked, down 8 percent in the first half of 2017 from the first half of 2016. Its second-biggest drug, Lyrica, barely grew over the same period, and that drug's lead patent expires in 2019.

Receding Tide
Pfizer's growing drugs will have a difficult time making up for a big slate of declining or set-to-decline medicines
Source: Bloomberg

Analysts expect Pfizer's sales to decline overall this year, and the company's 3.7 percent expected average annual growth rate for its net income from 2016-2021 is the lowest in Big Pharma, according to Bloomberg Intelligence. 

The company's $14 billion purchase of Medivation Inc. in 2016 was an effort to ameliorate this by adding a growth product in Xtandi and a relatively advanced pipeline asset in talazoparib. But Xtandi's growth has been glacial, and further progress may depend on uncertain clinical trials designed to expand its use. Talazoparib will arrive very late to a market where three similar medicines have already been approved. Many of Pfizer's in-house pipeline assets face similar challenges.

Wrong Way
Expectations for Xtandi have declined steadily since Pfizer acquired the medicine
Source: Bloomberg

Despite claims to the contrary, Pfizer is likely to think big, given the extent of its needs and the fear its Medivation bolt-on will end up a dud.

It's not as if the company is starving for cash. It generated more than $6 billion in net income in the first half of the year and spent $8.9 billion on its dividend and share buybacks over the same period. It has shown itself more than willing to aggressively use its shares as deal currency and to raise debt with its AstraZeneca and Allergan approaches. 

The company has substantial cash stashed abroad. But any deal that would significantly impact growth would likely require other funding, even with a repatriation holiday. And while certainty about tax reform might help clarify Pfizer's thinking about what it can spend, what assets are worth, and the tax efficiency of various moves, any shifts in value could work against it. A repatriation holiday could bring a bunch of competitor cash back to the U.S. and inflate asset prices. Considering Pfizer's experience with  Medivation, there's a case for taking advantage of the current deal lull to avoid bidding wars and possibly overpaying. 

And the clarity Pfizer claims to desire may not come any time soon. The long-running and yet-to-definitively die health-care-reform saga does not suggest the White House's "aggressive timeline" to overhaul taxes will match especially well with reality. 

A variety of M&A options are available to Pfizer. Waiting for clarity from the Trump administration and Congress isn't one of the good ones.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net