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

The rumors are true. Pfizer (NYSE: PFE  ) offered to buy AstraZeneca (NYSE: AZN  ) 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.

Company

Market Cap (in Billions)

Acorda Therapeutics

$1.4

Alkermes

$6.4

Auxilium Pharmaceuticals

$1.4

Biomarin Pharmaceutical

$8.3

Cubist Pharmaceuticals

$4.7

Incyte

$7.6

Isis Pharmaceuticals

$3.8

Jazz Pharmaceuticals

$7.8

Medivation

$4.4

Nektar Therapeutics

$1.4

NPS Pharmaceuticals

$2.5

Pharmacyclics

$6.7

Questcor Pharmaceuticals

$4.9

Salix Pharmaceuticals

$7.0

Seattle Genetics

$4.6

The Medicines Company

$1.7

Arena Pharmaceuticals

$1.3

Immunogen

$1.1

InterMune

$2.9

Ligand Pharmaceuticals

$1.3

Aegerion Pharmaceuticals

$1.3

Alnylam Pharmaceuticals

$3.2

ARIAD Pharmaceuticals

$1.3

Agios Pharmaceuticals

$1.3

Ironwood Pharmaceuticals

$1.3

Sarepta Therapeutics

$1.4

Keryx Biopharmaceuticals

$1.3

Theravance

$3.0

ACADIA Pharmaceuticals

$1.9

MannKind

$2.4

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 (NYSE: GSK  ) -Novartis (NYSE: NVS  ) -Eli Lilly (NYSE: LLY  ) 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.

Let's hope Pfizer retains its dividend (unlike after the Wyeth purchase)
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2933889, ~/Articles/ArticleHandler.aspx, 9/21/2014 2:25:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement