Pfizer Megadeal Still in Sight After Astra: Real M&A

After being rejected by AstraZeneca Plc, Pfizer Inc. still has a chance to clinch the drug industry’s biggest deal.

While Pfizer shelved plans in May to buy the U.K. company in a record-setting transaction, its plan B could be an even larger target, $118 billion GlaxoSmithKline Plc, according to Berenberg Bank. A takeover of London-based Glaxo, which has gotten about 8 percent cheaper in the past two weeks, would give Pfizer a lung-drug business and more vaccines. Another possibility, Irish-domiciled Actavis Plc at $57 billion, would offer a pipeline of new products and generic medicines. Either one may allow the New York-based company to move its headquarters abroad and lower its tax rate.

In hunting for a deal, Chief Executive Officer Ian Read is looking to reduce taxes and restock a dwindling stable of patent-protected drugs. Without an acquisition, Pfizer will have almost no revenue growth over the next decade, analysts’ estimates compiled by Bloomberg show. Rather than falling back on share repurchases to boost earnings, Pfizer should have done a deal by now, SunTrust Banks Inc. said.

“If they’re willing to go after AstraZeneca, they can obviously go after other sizable targets,” Kevin Kedra, an analyst at Gabelli & Co., a unit of Gamco Investors Inc., said in a phone interview from Rye, New York. “There’s not much to limit Pfizer except finding a deal that makes sense.”

Deal Motivation

The combination of cost savings, low borrowing rates and reduced taxes make the case for an acquisition, Kedra said. With U.S. lawmakers threatening to introduce legislation to thwart tax inversion moves, “there’s a lot of motivation to have a deal happen now,” he said.

Representatives for Pfizer, Actavis and Glaxo declined to comment. A representative for AstraZeneca said the drugmaker is focused on executing its strategy and can’t speculate on Pfizer’s intentions.

Glaxo shares gained 1.1 percent to 1,446 pence as of 3:22 p.m. London time, and AstraZeneca slipped 0.6 percent to 4,337.50 pence. Actavis fell 1 percent to $213.59 in New York trading, and Pfizer fell 0.7 percent to $28.56.

The prospect of lowering taxes has driven a flurry of deals in the past year. American drugmakers pay a 35 percent rate on all earnings, whether made here or abroad, while foreign companies pay that rate only on profits they earn in the U.S.

While the $117 billion acquisition of AstraZeneca would have made it possible for Pfizer to move to a lower tax jurisdiction and gain a robust pipeline, there are other possibilities.

“We continue to aggressively look at all types of business development, regardless of size, that we believe would add value to shareholders,” CEO Read said on a conference call last week.

Glaxo Perks

A takeover of Glaxo would offer the tax benefits of the AstraZeneca deal, and a few additional perks as well. Combining the two drugmakers’ vaccines businesses, for example, would create a “genuinely world class” vaccine division, Alistair Campbell and other analysts from Berenberg wrote in an Aug. 1 report.

Both Pfizer and Glaxo have segregated older drugs into established-products portfolios. Pfizer has already signaled an interest in divesting that piece, which contains medicines that have lost patent protection and are sold -- or about to be sold -- against generics. Merging it with Glaxo’s unit would allow for cost-cutting and then an eventual spinoff, the Berenberg analysts said.

Political pressure in the U.K. could make it hard for Pfizer to consummate a deal with Glaxo, according to Damien Conover, a Chicago-based analyst at Morningstar Inc.

Pushing Back

If the AstraZeneca transaction “caused a lot of pushback from the government on the U.K. side, Glaxo would cause more,” Conover said in a phone interview. “It’s a little more of a heritage in the U.K., and it’s a bigger company than AstraZeneca.”

AstraZeneca was valued at $93 billion yesterday, versus Glaxo’s $118 billion.

Pfizer also could consider a deal with Actavis, the world’s biggest generic-drug maker by its $57 billion market value. It acquired Forest Laboratories Inc. earlier this year for $24 billion, after subtracting net cash, which added brand-name drugs such as the Alzheimer’s treatment Namenda and blood-pressure pill Bystolic.

“It would make much more strategic sense for them to take a company like Actavis that has an established branded and generics component,” John Boris, an analyst at SunTrust, said in a phone interview. “They not only get a significant pipeline to inject in their U.S. franchise, they also get a very meaningful generics franchise.”

Actavis Appeal

Adding to Actavis’s appeal is its partnership with Amgen Inc. to develop biosimilars, copies of complex biological drugs which can earn fatter margins than traditional generic medicines, said Gabelli’s Kedra.

“It could be an attractive opportunity for Pfizer to pick up the Actavis pipeline and maybe partner with Amgen on what could be a promising field of new drugs,” he said.

Some shareholders say they’d rather see Pfizer use its cash to repurchase stock than make a bet on a large acquisition.

Pfizer had about $34 billion of cash and equivalents as of the end of March. Its bid for AstraZeneca was 45 percent cash and 55 percent stock.

“We prefer buybacks over takeovers,” said Barry James, who helps oversee $5.5 billion as president of James Investment Research Inc., a Pfizer shareholder in Xenia, Ohio. “I can’t say from a strategic point of view if a takeover would be good, but in the shorter term they rarely work well for shareholders, which is our chief concern for our clients.”


A Bloomberg News analysis last year found that about two-thirds of company takeovers exceeding $20 billion since 1996 -- including Pfizer’s merger with Pharmacia Corp. -- generated losses for the acquirers’ shareholders.

In its dealmaking, Pfizer should focus more on replenishing its pipeline than reducing its tax rate, according to Tony Scherrer, director of research at Seattle-based Smead Capital Management, which oversees $957 million and owns Pfizer stock. He’d prefer that Pfizer repatriate some of its overseas cash, which would give the company more options for how to spend it.

“They would open up their options if they had the cash here domestically,” Scherrer said in a phone interview. “There’s a lot of good stuff here that could be potentially interesting to them that I think maybe they aren’t looking at as hard because they’re trying to get this double-whammy upside.”

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