The patent cliff has radically transformed the healthcare landscape. Many, if not all, Big Pharmas simply aren't what they once were at the height of their commercial prowess.
What has emerged from the wreckage is a handful of household names flush with cash but desperately short on growth. Pfizer (PFE 0.46%)typifies this problem all too well. This pharma behemoth has lost patent protection for top sellers including Celebrex and Lipitor, and has been unable to develop suitable replacements.
Aside from the company's up-and-coming experimental drugs for cancer (palbociclib) and high cholesterol (bococizumab) along with new iterations of Prevnar, the cupboard looks next to bare on the potential blockbuster drug front. And even these clinical candidates aren't expected to turn the tide, with Pfizer's earnings per share projected to drop into negative territory next year.
Management is searching for options
Earlier this year, a media circus erupted over Pfizer's reported interest in AstraZeneca (AZN -0.15%). The deal would have exceeded $100 billion and created a company roughly the same size as Johnson & Johnson. AstraZeneca brass, however, felt the massive deal actually undervalued the company, even though the British drugmaker has seen revenue plummet in the wake of its own patent issues.
This failed buyout taught us three things about Pfizer. First, the U.S. company really wants to lower its effective tax rate by changing its address to another country. On a related matter, management appears unwilling to repatriate the reported $40 billion the company has in foreign accounts, presumably to avoid U.S. taxes. Finally, we learned that Pfizer would like to enter the coveted immuno-oncology field, where it has lagged peers AstraZeneca and Bristol-Myers Squibb in a big way.
Acquiring AstraZeneca would have resolved all three of these problems for Pfizer, which is probably why the company is interested in reviving talks down the road.
Should Pfizer look elsewhere? Actavis perhaps?
AstraZeneca doesn't appear to be enthralled with the idea of merging with Pfizer, and the British government is far from enthused, given the potential for widespread layoffs. Because of these roadblocks, Pfizer has taken an interest in other foreign pharmas as potential buyout candidates. Actavis (AGN) has bubbled to the top of the rumor mill.
Ireland-based Actavis is an intriguing target for Pfizer because it has a tax-advantageous address and has been posting stellar top-line growth for years, as shown by the chart below.
An Actavis acquisition would also come at a deep discount compared to AstraZeneca, given the two companies' drastically different market caps ($63 billion versus $90 billion).
The biggest downside is the lack of an immuno-oncology program at Actavis. Then again, Pfizer could use the $20 to $30 billion in savings to go after a smaller immuno-oncology company or even a host of companies.
Five Prime Therapeutics, for instance, has caught the attention of a number of Big Pharmas on the research front lately. Put simply, Pfizer would have ample options if it didn't get everything it wanted from an Actavis deal.
Foolish wrap-up
Pfizer is undoubtedly playing catch up to its Big Pharma peers at this point. And even after yesterday's news regarding the Treasury Department instituting new rules to lower the incentive for tax inversions, I expect Pfizer to make a big splash soon mergers and acquisitions-wise. After all, these new rules might reduce the case for moving abroad in some aspects, but Pfizer has problems larger than tax liabilities.
In many ways, Actavis looks like a great solution to Pfizer's woes. It offers strong top-line growth, a healthy clinical pipeline, and a tax-friendly address. But perhaps the real driver for an Actavis deal is the lack of good alternatives. Bristol-Myers is one obvious name to put on the list, but it looks grossly overvalued at current levels. I don't see Pfizer wanting to pay a premium for that company.
In sum, I think an Actavis-Pfizer pairing makes a lot of sense. That said, Big Pharma has a way of cutting deals that come out of left field.
