by Dan Burrows | May 5, 2014 1:20 pm
Pfizer (PFE) has made it abundantly clear why it wants to buy AstraZeneca (AZN) for $100 billion to create the world’s largest drug company, but it’s latest quarterly results underscore just how much PFE and Pfizer stock need this deal with AZN.
Pfizer stock slumped Monday after PFE said first-quarter earnings fell 15% on a revenue decline that missed Wall Street estimates. Given what came through in latest quarterly report, there will be no real upside in Pfizer stock until it gets its pipeline going again.
PFE stock has had some sharp up and downs, but it’s sitting in the negative for the year-to-date. Like many large pharmaceutical companies, PFE is suffering from the expiration of patents on a number of key blockbuster drugs.
Research and development takes ages, so the quickest was to rebuild a product portfolio is to buy another pharma company. That’s why we’ve seen a frenzy of mergers and acquisitions in the sector this year.
And that’s why PFE wants to buy AZN.
For the most recent quarter, PFE said net income declined to $2.33 billion, or 36 cents per share, from $2.75 billion, or 38 cents per share, a year earlier. Excluding accounting adjustments and other special items, earnings per share rose to 57 cents a share from 51 cents.
The good news for anyone holding Pfizer stock is that earnings did beat analysts’ average estimate by 2 cents per share, according to a survey by Thomson Reuters.
Revenue, however, was another matter. The top line retreated by 8.5% to $11.35 billion. On an adjusted basis, revenue was even worse, falling 9% to $11.3 billion. Wall Street was looking for revenue of $12.08 billion.
PFE came up short exactly where you might guess, given how desperate it is to rebuild its drug portfolio. Revenue was hammered by Pfizer’s two largest businesses — pharma and consumer health — as Lipitor and some other key drugs lost exclusivity. Additionally, PFE had a collaborative agreement for Spiriva that expired in a number of countries.
Pfizer was able to beat on the bottom line and affirm its earnings outlook thanks to cost cuts and buybacks of PFE stock. But neither of those moves will get revenue growing again.
Pfizer has made a clear case for why it wants AstraZeneca. Merging PFE and AZN would expand Pfizer’s portfolio of drugs for cancer, diabetes and cardiovascular disease. A Pfizer-AstraZeneca tie up would also bolster Pfizer’s presence in emerging markets.
And then there are the “synergies” — code for cost cuts and layoffs — that would help support Pfizer stock. Indeed, PFE has eliminated more than 56,000 jobs worldwide since 2005.
Ugly as that might be, Pfizer sure knows what it’s doing.
But AZN is playing very hard to get. There’s no guarantee that PFE will get this deal, and that creates uncertainty for Pfizer stock — and AZN stock, too — in the short term.
In the longer term, if AstraZeneca falls through, Pfizer needs to find another M&A partner soon. PFE stock isn’t going to get much support until revenue starts growing again.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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