Britain's AstraZeneca (AZN +0.00%) on Monday rejected Pfizer's (PFE 1.10%) "final" $118 billion dollar bid. The megadeal died for many reasons, including cash problems and suspicions about motives between the two companies, according to Erik Gordon, University of Michigan business school professor.
But is anything ever truly "final" in the drug company world? Pfizer could once again sweeten the deal before its do-or-die deadline of May 26. Or they could come back in six months and try again. But right now, the American pharmaceutical giant looks set to give up. The odds of Pfizer creating the biggest drug company in the world are all but dead, according to The Economist.
And that leaves investors with two million dollar questions. Why did the deal go bad? And what exactly did Pfizer see in trouble-plagued AstraZeneca in the first place? The answers could provide an idea on where these two Big Pharma companies could be headed this year.
Why AstraZeneca said no, again
Pfizer's proposed takeover would have been the largest-ever acquisition of a British company by a U.S. company. The offer was gigantic, and some politicians in Britain did a lot of huffing and puffing about United States poaching. AstraZeneca cast itself as fearful of having its science and workforce eroded, saying that AstraZeneca was better off on its own.
To shore up that claim, (investors clearly didn't agree based on the stock action) company executives pointed to AstraZeneca's immuno-oncology pipeline. Along with other drugs, they forecast a peak sales potential for the pipeline of about $23 billion.
To be frank, a drug company's management can attach any value they want to a forecast, but this particular number seems...perhaps a little optimistic. It implies a 36% chance of success overall, according to Bloomberg, considerably higher than the industry average.
From the ground level, AstraZeneca has several promising cancer medicines. But these drugs are still in development, and their success is uncertain at best. In other words, it's an interesting oncology pipeline, but it doesn't cut the mustard as necessarily industry leading. At least, not yet. Nor does it hide the fact that AstraZeneca is facing a long-dreaded trilogy of blockbuster patent expirations -- Seroquel, Nexium, and Crestor.
Pfizer's motivation
AstraZeneca claimed all along that Pfizer's pursuit was motivated by tax minimization. While its headquarters would remain in New York, a Pfizer-AstraZeneca merger would be domiciled for tax purposes in the U.K., reducing its corporate tax.
Inversion transactions are common these days, and Pfizer has financial assets worth nearly $50 billion, much of which is reportedly held overseas. Pfizer needs cash to pay dividends, pay down debt incurred from its Wyeth acquisition, and perhaps acquire more U.S. companies.
So was the offer really about drugs? Or taxes?
Pfizer's latest quarterly results show that, regardless of its actual motivation, its deals should be about new drug opportunities. Pfizer's top line is sputtering as the company struggles with competition and expiring patents. According to 10Q filings, Pfizer's top line fell by 9% to $11.35 billion in Q1. Of course, the company has drug development opportunities -- palbociclib, which snagged a breakthrough therapy designation from the FDA last year, is being submitted for approval based on phase 2 data as a first-line treatment for post-menopausal women with locally advanced or metastatic ER+ HER2- breast cancer, is a classic example.
Foolish final thoughts
Pfizer can redeem itself. There are some strategic biotechs that could add needed blockbusters to the company's lineup for a lot less money than AstraZeneca. Check out this list by Foolish author Brian Orelli for some ideas and examples. Research and development takes ages, so to my mind the quickest way to rebuild a portfolio is to buy a series of smaller companies.
Despite the apparent end of merger hopes (at least for now -- although again, never say never), the world's not going to end for either of these Big Pharma companies. The megamerger would have meant a quick payoff for AstraZeneca shareholders, but the company is executing on a potential growth strategy that may -- at least, according to management -- pay better dividends along the way.
I think Pfizer may be stuck spinning its wheels for a while, but perhaps management will do some portfolio assessing, and be more likely to shop based on finding strategic products rather than tax re-engineering. If so, hopefully they'll quickly get their pipeline up to speed again.
