Pfizer Could Buy These 30 Biotechs Instead of One AstraZeneca (but It Won't)

The rumors are true. Pfizer (PFE -0.12%) offered to buy AstraZeneca (AZN -0.25%) for $76.62 per share, valuing the company around $100 billion.

A hundred billion!

To put that in perspective, instead of buying AstraZeneca, Pfizer could buy these 30 biotech companies for the same amount it's willing to shell out for the U.K. pharma.

Source: Motley Fool CAPS.

Not all of the companies have drugs on the market, but they did collectively book $8.3 billion in revenues in their most recent quarters. Some of that revenue is in the form of milestone payments or repayment of R&D expenses from partners, but it's still higher than the $6.8 billion that AstraZeneca booked in its most recently reported quarter.

And I'd bet the group collectively has a better pipeline than AstraZeneca.

Even if you figure that Pfizer would have to offer a 20% to 30% premium to acquire the companies, I think acquiring most of them would still create a better value for Pfizer than buying AstraZeneca, especially considering the growth potential of the smaller-companies' drugs is arguably better than AstraZeneca's drugs.

But it won't
It's a geography thing. Times two.

First, Pfizer has a lot of cash earned and stored overseas -- $69 billion -- that it would have to bring into the U.S. -- and pay tax on -- if it wanted to buy the biotechs above, most of which are based in the U.S.

Second, buying AstraZeneca would allow Pfizer to establish a new U.K.-incorporated holding company that wouldn't have to pay U.S. tax on much of its sales, effectively lowering Pfizer's tax rate. Corporate tax rate in the U.S. is 35%, but the U.K. charges companies 21%, which will drop to 20% next year.

Smaller biotechs have used the tax inversion strategy, but this is the first we've seen a big pharma moving offshore to save a few bucks on taxes. Because tax laws require the shareholders to own less than 80% of the new company that's moved offshore, Pfizer couldn't just buy one of the smaller offshore biotechs and call its offices Pfizer's new headquarters.

Build to break up
The other obvious problem with buying 30 small biotechs is that it takes more time and energy than making one large investment. After Pfizer's fairly seamless integration of Wyeth and Merck's incorporation of Schering-Plough a few years ago, pharmas likely feel they can make the large integration work.

Never mind that Wyeth was only a $68 billion acquisition. And Merck's purchase of Schering-Plough was two-thirds of that and the companies were partners on multiple drugs.

Interestingly Pfizer has started reporting in three distinct business units with a plan to potentially breakup in the future once it has enough data to value the three units. While adding $27 billion in annual sales would seem to opposite of a breakup plan, they're not necessarily polar opposites. There's a critical mass needed to make economies of scale work. Having your sales force sell three hematology drugs instead of one or two, can make things much more efficient, for instance.

That was the main argument in the GlaxoSmithKline (GSK -0.83%)-Novartis (NVS -0.55%)-Eli Lilly (LLY -0.64%) deal announced last week. GlaxoSmithKline gets a larger vaccine business, which Novartis was losing money on and Novartis gets Glaxo's oncology program. The companies established a joint venture to sell their OTC products (again, scale is king). And Eli Lilly picked up Novartis' animal health business which should help it compete with Pfizer-spin-off Zoetis. All three companies get units that are bigger than they had previously, allowing for economies of scale.

It seems possible that Pfizer realized a third of the current company wasn't going to reach the critical mass required to make things efficient so it's trying to add AstraZeneca to bulk up before eventually breaking up.