Pfizer (PFE +0.46%) is in the midst of a major shake-up that should change the face of the company forever. Over the past few years, the drugmaker has already reorganized its business into two distinct operational segments, sold off its animal healthcare unit, and snapped up a leading player in the biosimilar space, Hospira. And more changes are probably on the way.
Source: Wikimedia
The catalyst behind this transformation is the ongoing tug-of-war between former top brands such as Celebrex that have lost exclusivity and newer blockbusters in the making such as Ibrance and Prevnar 13. In short, falling revenues on legacy products are hurting the company's top and bottom lines in a big way and obscuring the stellar sales growth that's taking place among Pfizer's newest brands.
In the first quarter, for instance, Pfizer's Global Established Pharmaceutical segment's revenues dropped by 10% operationally. So even though Prevnar's U.S. sales rose by a whopping 80% year over year, the company's total revenues fell by 4% and its adjusted diluted earnings per share by 11%, relative to a year ago.
The pharma giant is thus reportedly considering ways to spin off its legacy products as a standalone business. Consequently, the Street has been speculating rampantly about the drugmaker's next move.
Deutsche Bank, for instance, recently suggested that Pfizer might buy out the struggling British pharma GlaxoSmithKline (GSK 0.31%), in what would be one of the largest ever mergers in healthcare.
Source: Wikimedia Commons.
Given that several analysts have now floated this idea over the past year, I think it's worthwhile to consider whether a Pfizer-Glaxo pairing makes sense.
A Pfizer-Glaxo marriage looks good on paper
One of Pfizer's core areas of expertise is the development of vaccines for infectious diseases. And this business has been stunningly successful.
Per the first-quarter numbers, Pfizer's vaccine sales rose by a staggering 51% on an operational basis, and the rapid development of experimental vaccines for Staphylococcus aureus and Clostridium difficile should help to sustain this growth going forward.
After failing to break into the immuno-oncology market last year, Glaxo swapped its oncology unit for a portion of Novartis' vaccine portfolio, giving it one of the broadest and most diverse vaccine portfolios in the industry. So this is definitely an area of shared strength between Pfizer and Glaxo that would create some compelling synergies.
Pfizer and Glaxo also have a common link through their joint venture HIV business, ViiV Healthcare, that's been going gangbusters lately because of the commercial launch of Tivicay. A buyout would therefore give Pfizer a controlling interest in this high-growth business.
Another key issue is that Glaxo's British address would help to significantly lower Pfizer's effective tax rate, which currently hovers around 25%. Indeed, Glaxo's effective tax rate has historically been closer to 15%.
Is this megamerger Pfizer's next move?
Despite a handful of shared interests, I don't see Pfizer buying Glaxo, for a couple of reasons. First off, Glaxo is dealing with its own legacy product issues with Advair, and payers have demanded steep price discounts for the pharma's next-generation respiratory medicines to give them favorable reimbursement status.
Glaxo also lacks significant clinical assets in both immuno-oncology and rare diseases after the failure of some of its higher-profile candidates, such as MAGE-A3, a cancer vaccine, and drisapersen, for Duchenne muscular dystrophy. Those are two areas I would expect Pfizer to hone in on any megamerger, and Glaxo simply doesn't have the goods.
That's why I think this deal would ultimately take place only if Pfizer strikes out on better options such as Shire plc. Then again, mergers in the biopharma space don't always follow the path of least resistance. Stay tuned!
