Pfizer (PFE 0.40%) has been roundly criticized by shareholders and analysts alike for its bid to buy AstraZeneca (AZN 0.73%) for both being excessive at $118 billion and for being what some saw as a cynical financial engineering move to reincorporate at lower corporate tax rates in the UK, despite the captial gains taxes that would be triggered on American shareholders. Well, the critics seem to have gotten what they wanted when the deal fell through. Pfizer's price remains 12% off its 52 week high and 9% down since the beginning of negotiations with AstraZeneca. The question then becomes should we view this failure as an indictment of Pfizer management, or is now the right time to buy?
Source: Ycharts.
Shifting Corporate Strategies
Part of the reason why long term Pfizer investors reacted negatively to the merger plans is because it conflicted with the corporate strategy announced in 2013 to split Pfizer into separate companies.
The original plan involved a division of the company into three units consisting roughly of their patent-stable properties, their medications set to expire in the next five years, and their generics business, and the internal company structure and leadership was divided along these lines. This division is the culmination of strategy focusing research efforts that began in 2011 with the sale of its hard capsule business followed by the sale of its nutritional division in 2012 and animal heath division in 2013, collectively netting the company $16.4 billion, and Pfizer has been able to increase its net income despite declining revenue since 2011. These activities were widely supported by analysts and shareholders, and the recent three way trade deal between GlaxoSmithKline, Novartis, and Eli Lily represents an adoption of the divest-and-focus strategy by the larger pharmaceutical industry.
What's so good about Pfizer?
By the numbers, Pfizer currently looks like an excellent buy. It has a very low P/E ratio for the pharmaceutical industry at 12.5 and a solid dividend yield of 3.6%. And the numbers could get even sweeter if Pfizer returns to its 3-way division strategy, as the cash generated from the sale of their generics and aging pharmaceutical portfolio is returned to shareholders in the form of buy-backs and dividends, like during their previous sales. Much hay has been made about Pfizer's aging patent portfolio, in particular the expiration of Lipitor, once the world's best selling medication, and the double digit declines in sales of other drugs like Viagra. The sale of these medications under the banner of a new company could provide the immediate revenue stream to empower a leaner, more focused core research, as well as the cash to acquire future blockbusters from smaller biotech companies, many of whom look more attractive to me than the equally aging AstraZeneca.
Back to the good old days?
But the real question is will Pfizer's senior management be willing to take this route? I suspect that it will return to its pre-merger division plan because it was sound and popular. And that makes Pfizer a decent investment at these prices. And the sooner we put this behind us the better, if you ask me.
