A red-hot year for dealmaking in the pharmaceutical industry would go volcanic if Pfizer Inc. (PFE) really does acquire Allergan PLC (AGN), as reports suggest, and that bodes well for Pfizer stock and the rest of the sector.
The market adores mergers and acquisitions. True, such deals usually line the pockets of investment bankers better than shareholders, but retail investors should still be thankful for them.
Increased mergers and acquisitions activity signals confidence in the economy on the part of corporate management teams. It also reduces the total number of shares trading on the U.S. equity market.
And, of course, mergers and acquisitions are often the only way for a company the size of PFE to achieve some seriously material growth. And the deal, if it happens, would be huge for Pfizer stock.
Pharma companies are always looking to add to their pipelines as blockbuster drugs come off patent and go generic. Furthermore, a slow-growth U.S. economy, sluggish global scene and strong dollar are pressuring the top lines of a wide range of companies.
Against that backdrop, big deals can make a lot of sense — and this would be a very big deal, indeed. It would easily top PFE’s failed bid for AstraZeneca plc (AZN) last year, which would have been a whopper.
AGN has a market capitalization of $113 billion. Of course, PFE would have to pay a premium to that to bring AGN into its fold.
Should the deal come to pass, the new company would have a market cap of about $332 billion. That would make it bigger than Johnson & Johnson (JNJ), which is the largest name in the sector. Heck, if this acquisition goes through, PFE could become the fifth-largest stock on the U.S. market.
PFE Hunting for M&A
PFE has been busy on the deal front this year — it picked up Hospira for $17 billion — but the AGN acquisition would do much more to stimulate revenue growth.
It’s tough for a company as large as PFE. Revenue is actually expected to decline this year, as are earnings per share. AGN, however, is projected to post top-line expansion of nearly 40% in 2015, thanks in large part to the blockbuster that is Botox.
Research and development takes ages and costs a fortune. Buying another pharma company with a proven hit on its hands is often an easier way to prime to the pipeline. AGN itself is the result of three deals struck since 2012.
There’s no guarantee that PFE will buy AGN, but in the short term at least, it’s certainly good for Allergan stock. Shares jumped by 10% in the first 90 minutes of trading. Owners of Pfizer stock seem be making up their minds, still. The stock gapped down at the open before bouncing back … and falling back down to a 3% loss as of this writing.
Pfizer stock has been an excellent performer in a bad year for equities. PFE is up 11% to beat the broader market by about 10 percentage points. AGN was up about 9% before the merger report lifted shares.
Time will tell if PFE and AGN can pull off what would be the most massive deal of the year, but investors should be rooting for it. Indeed, mergers and acquisitions are one of the legs supporting Pfizer stock and other pharma names these days.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
