Unlike Walter White's criminal drug dealing, which led to his final comeuppance in the pop culture TV hit "Breaking Bad" last fall, the current flurry of big pharma company deals should end exactly the opposite -- if history is any indicator.
Reading the tea leaves is always a murky proposition, but history shows that big pharma mergers can be very lucrative for investors. Pfizer's (NYSE: PFE) acquisition history was one target of a recent McKinsey & Company paper about pharma-megamergers, showing that they significantly outperform large deals in other industries. In the study, Pfizer and sixteen other big pharma mergers in the mid- to late 1990s were compared. On average, excess shareholder returns were five percent above the industry index for two years after the deal's announcements.
In particular, Pfizer's $90 billion takeover of Warner-Lambert in 1999 drove significant value creation for shareholders, with Pfizer's EBITDA margins expanding by more than 10 percent. By contrast, the Pfizer-Wyeth merger was less successful. The EBITDA for the combined company improved by just one point in the two year period after the transaction. Still, Pfizer has been generally successful at mergers, with cost synergies and increased post-deal revenue overshadowing the challenges of large-scale integration.
After Pfizer's dismal Q1 earnings release, it became clear that acquiring rival drug maker AstraZeneca (NYSE: AZN) is more mission critical for Pfizer than previously expected. But analysts are divided on whether AstraZeneca's stockholders would equally benefit from Pfizer's takeover. The British drug maker is making a strong claim that its pipeline of cancer drugs is one of the best in the industry. Unfortunately, a lot of that pipeline is miles away from FDA approval, and AstraZeneca's projections of $23 billion annual revenue from its pipeline are being called so much blue sky. Pfizer CEO Ian Read seems completely committed to the deal, and since Pfizer has tens of billions in offshore accounts, they may end up giving AstraZeneca a deal they can't refuse.
Assuming it goes through, the Pfizer-AstraZeneca proposition has an interesting twist that might make it even more valuable than usual. With AstraZeneca's products in hand, Pfizer could beef up its established products unit for sale or spinoff action, unlocking even more value for shareholders. AstraZeneca's Seroquel and Nexium would add significant revenue to Pfizer's established product line, more than making up for dropping sales on Pfizer's once top-selling statin Lipitor.
It's a classic case of getting bigger to go smaller. If Pfizer adds these product sales to its near-term revenue, it could then capitalize on them if it decides to spin off one of its established products businesses. Pfizer currently has three businesses: 1) innovative drugs, 2) vaccines, oncology, and consumer health, and 3) established products. None have the scale to stand on their own. But with the AstraZeneca deal, Pfizer might eventually split into three entities.
That said, Pfizer isn't the only pharmaceutical company out to conjure up a deal. Novartis (NYSE: NVS), GlaxoSmith Kline (NYSE: GSK) and Eli Lilly & Co (NYSE: LLY) all closed deals worth $28.5 billion recently. And Valeant Pharmaceuticals (NYSE: VRX) made a $46 billion dollar offer for Allergan (NYSE: AGN).
Allergan rejected the initial offer, but there are significant synergies between Valeant and Allergan. Both companies focus on eye care and dermatology. (While Allergan is best known for Botox, it also provides drugs for glaucoma, retinal disease and dry eyes.)
Allegan has been on a roller coaster ride looking for new suitors, and it's even possible Pfizer might swoop in if it isn't successful with AstraZeneca. But Valeant's management is well known for its fast-track, take-no prisoners approach to acquisitions. The company acquired Bausch and Lomb in August, 2013, and Obagi Medical Products a few months before that.
The constant deal-making in big pharma can be hard to keep track of for stockholders, but it's nice to know history supports good outcomes. At least, better outcomes than found in even the most A-1 quality TV dramas.
