Pfizer’s Miss on AstraZeneca May Put Breakup Back in Play

With prospects for an AstraZeneca Plc deal falling apart, Pfizer Inc. Chief Executive Officer Ian Read is facing a new question from investors: What now?

There aren’t other ripe targets offering the triple benefits of a lower tax rate in the U.K., cost savings and new cancer drugs, analysts say. Without AstraZeneca’s promise of new growth, Read, 60, will likely return to an earlier plan to further break up what was once the world’s biggest drugmaker.

Read has split Pfizer into at least two units internally, with the idea they may one day be spun off on their own, potentially giving investors a choice between one business stocked with brand-name drugs and a second with older products.

While Read may have failed with AstraZeneca, he’s gained a reputation for doing what’s needed to please investors. Pfizer’s shares have gained 75 percent since he took over as CEO in December 2010. “He’ll do anything to get the stock price up,” said Jeff Jonas, an investor with Gabelli & Co. in Rye, New York. “As long as he continues to have that view, he’ll be fine.”

AstraZeneca yesterday rejected New York-based Pfizer’s third takeover offer, for 69.4 billion pounds ($117 billion). At the same time, London-based AstraZeneca’s chairman, Leif Johansson, said the deal -- the largest ever in the industry -- was probably dead under U.K. takeover rules.

Read could now look elsewhere. The company’s business development team had previously considered acquisitions of Merck & Co. and Bristol-Myers Squibb Co., according to two former executives familiar with Pfizer’s plans who asked for anonymity because the discussions were private.

Cancer Therapies

Like AstraZeneca, Merck and Bristol-Myers are experimenting with a new generation of cancer treatments that use the body’s immune system to attack tumors. They also have existing partnerships with Pfizer that could have been the first steps of a tie-up.

It’s unclear how far the examinations of Merck and Bristol-Myers went, or if they were just war-gaming by the company’s deals team, the two former Pfizer executives said. Steve Cragle, a spokesman for Whitehouse Station, New Jersey-based Merck and Laura Hortas, a spokeswoman for New York-based Bristol-Myers, declined to comment.

Neither company, though, offers what AstraZeneca did -- a chance to legally relocate to the U.K. to take advantage of that country’s lower tax rate, or to deploy a huge chest of cash stuck overseas and out of the reach of U.S. tax law.

At the same time, another mega-merger attempt might not be welcomed by investors, said Gabelli’s Jonas. “I wouldn’t want to see them go after another big deal,” he said. “There’s not that many targets, and this was one that made sense.”

‘There’s Nobody’

Part of the dilemma for Pfizer is that no other company hits all of its needs on tax, cost savings and new drugs. “There’s nobody,” Mark Schoenebaum, an analyst with ISI Group LLC in New York, said in a telephone interview. “I don’t think there’s much else they can do.”

Since becoming CEO in 2010, Read, an accountant by training, has sold two non-drug businesses in $10-billion-plus deals, reorganized the company’s management, and trimmed and refocused its research. Pfizer’s stock has out-performed the Standard & Poor’s 500 Index during his tenure and gained more than U.S.-based competitors Merck, Eli Lilly & Co. and Johnson & Johnson. The moves have helped keep the company on an even keel after the patent loss of the Lipitor cholesterol pill, once the world’s best-selling drug with almost $13 billion in peak sales.

Better Outcome

Anant Sundaram, a professor studying deals and valuations at Dartmouth College’s Tuck School of Business in New Hampshire, said a failure to buy AstraZeneca may not be the worst thing for the company.

“When bidders walk away from these overvalued deals, it ends up very well for the bidding company’s shareholders,” Sundaram said in a telephone interview.

Still, an AstraZeneca deal remains a possibility with six days left for the companies to reopen talks before a U.K.- imposed May 26 deadline, and the option for Pfizer to reopen the talks six months later once the heat of the current give-and-take has died down.

Pfizer said the deal’s fate “is now up to AstraZeneca’s shareholders,” according to an e-mail from Joan Campion, a company spokeswoman. “We believe our final proposal represents compelling and full value.”

“I have a feeling we haven’t heard the last of this, by any sense,” Sundaram said.

One of Pfizer’s main issues is that the company is so big, any moves it makes have to be equally dramatic in scale to make a difference. After a decade that saw Pfizer swallow three acquisitions worth of a collective $216 billion, bringing one new blockbuster drug to market doesn’t make much of a dent.

“After a while, size becomes its own enemy,” Sundaram said. “The scale of wins that you need to move the needle on market value get proportionally larger, and hence more difficult. Single products here and there are simply not enough, or fast enough.”

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