by James Brumley | April 22, 2014 8:53 am
Why would a solid, promising pharmaceutical play like Pfizer (PFE) ever be interested in acquiring a problem-riddled, shaky company like AstraZeneca (AZN)?
First and foremost, know that Pfizer’s rumored acquisition interest in AstraZeneca appears to have come and gone without anyone noticing that the two companies met several months ago to discuss a union.
While nothing is ever final, those meetings ended with no further actions planned, and no plans for future discussions of such a deal that might boost the value of Pfizer stock. The odds of an acquisition panning out after a failed effort are even weaker than they are the first time the idea came up.
That being said, where there’s smoke, there’s fire. If Pfizer was interested in a then-struggling AstraZeneca a few months ago, with no major changes to the company’s structure, properties, and pipeline in the meantime, there’s no reason to think the iconic pharmaceutical maker would be unwilling to entertain the idea again now.
The million-dollar question Pfizer stock holders as well as AZN stock owners are asking themselves now is, what exactly did Pfizer see in AstraZeneca in the first place? As it turns out, the three best explanations are pretty straightforward. But are they enough reason to go through with the deal?
The motivations are (in order of most-likely to less-likely):
While Pfizer has done a reasonably good job of refilling its pipeline and product portfolio following the patent expirations of Lipitor and Viagra just to name a few, one of the biopharma areas where it’s lacking is on the cancer front, and on the immunology front in particular. That has made some investors worried about the future of Pfizer stock.
AstraZeneca has a compelling, though not quite outstanding, development pipeline of cancer-immunology drugs. Granted, the biggest reason AstraZeneca has such a robust oncology-immunology pipeline is because it acquired Amplimmune in 2013, but it’s still under the AstraZeneca umbrella.
The shining star in the early-stage pipeline is tremelimumab, for mesothelioma. It’s only in Phase 2 trials right now, however, spurring concerns that the company doesn’t have much that could be brought to market in the foreseeable future. But those are errant assumptions. Olaparib (for ovarian and breast cancer), moxetumomab (for leukemia), and selumetinib (for non-small cell lung cancer) are all Phase 3 candidates that could provide some real support for the value of Pfizer stock.
Still, the best part of the pipeline is in its early stages.
While the potential tax benefits of U.S.-based Pfizer buying U.K.-based AstraZeneca are and will be fuzzy until the details of any deal are finalized, there are two major tax considerations that make the potential acquisition compelling to anyone who owns a stake in Pfizer stock.
The first tax benefit is the avoidance of a taxable repatriation of cash earned by Pfizer’s overseas subsidiaries. Although using that otherwise-idle cash in this manner only delays repatriation-taxation rather than circumventing it, at least it makes productive use of that $69 billion before the hit is taken. The alternative is to tax it heavily, now, should it be passed along as a Pfizer stock dividend.
The other tax upside to an acquisition of AstraZeneca is that it could somewhat-seamlessly allow Pfizer to move the corporation’s home to the United Kingdom, where it would feel a slightly smaller tax pinch.
While AstraZeneca would bring plenty of problems with it, the deal may be too good for Pfizer to pass up, warts and all.
As it stands right now, AZN stock is valued at an affordable forward-looking P/E of 16.4. Yes, AstraZeneca will see revenue deteriorate on the heels of patent expirations from Crestor, Seroquel, Nexium, and other key drugs. The market may have overestimated the impact of the company’s tumble over the patent cliff, however, in light of a deep and wide pipeline as well as a few off-the radar drugs that could end up selling surprisingly well. One of those drugs is a diabetes treatment — an area that has become quite important to AstraZeneca in the last couple of years.
The point being, AstraZeneca may be down, but it’s certainly not out, even though the market is largely pricing in the worst-case scenario.
It would likely take all of the above reasons to prompt Pfizer to actually pull the trigger on the $100-billion deal. While it’s not a mismatch per se, there’s not a lot of synergy — beyond the usual cost savings that come with eliminating redundancies — to be realized here on the R&D front.
Pfizer stock owners may be better off if the company were to hunt and peck for some highly-compelling, one-trick-pony biotechs that could add a blockbuster or two to the pipeline for relatively little money. Indeed, that may be why Pfizer backed away from the table a few months ago. It’s unlikely anything has changed in the meantime, except for the surge in the price of AZN stock, which just made an already-lackluster deal even less attractive than before.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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