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Is A Big Acquisition Is Due For Pfizer?

The word on the street is that Pfizer ( PFE ) may attempt another acquisition this year. An analyst from Jefferies believes that it would make more sense for the company to go for a mid-sized acquisition, citing Perrigo and Shire as potential targets. Whereas Deutsche Bank has a different take and believes that Pfizer needs to make a big acquisition, which will potentially improve its market valuation in the medium term. The bank mentions GlaxoSmithKline as a potential target, which can not only provide tax savings but also strengthen Pfizer's pipeline.

Recent events suggest that small to mid size acquisitions may continue, such as Hospira's acquisition and its research collaboration with AM-Pharma (which includes an option to buy the company). However, in our view, Pfizer may attempt a big acquisition such as similar to the one it attempted last year when it made a bid for AstraZeneca. Such a move would be consistent with the company's history, its strategic focus and management philosophy. Pfizer has a long history of making big acquisitions. Even though its CEOs have initially taken a position against deploying a strategy of acquisition to drive growth, they have inevitably made some of the industry's biggest business purchases. In 2000, Pfizer acquired Warner-Lambert for $112 billion primarily because it didn't want to lose the control of Lipitor, which went on to become one of the highest selling drugs the pharmaceutical industry has ever seen. In 2003, Pfizer bought Pharmacia for $60 billion in stock. This acquisition was driven by its interest in blockbuster Arthritis drug Celebrex. In the year 2009, the company made acquired Wyeth for $68 billion.

Our price estimate for Pfizer stands at $35 , implying a premium of about 15% to the market price.

See Full Analysis For Pfizer

A Big Acquisition Will Aid Market Dominance And Bring In Cost Synergies Large Enough To Impact Shareholder Value Meaningfully

Except for oncology and the Prevnar/Prevnar 13 franchise, Pfizer's revenues, in our view, are likely to fall across all sub-segments including the cardiovascular, immunologic, metabolic and musculoskeletal disease areas. This suggests that the company could be looking to make an acquisition that will impact its overall portfolio, and not just 1-2 key segments. This implies that a big acquisition may be on the cards.

Another factor behind our line of thought is the large magnitude of cost savings in a large acquisition that result from the streamlining of operations and removal of redundant processes. On short, cost synergies big enough to meaningfully lift Pfizer's value can only be realized with a big acquisition. The acquisition of AstraZeneca (had it been successful) could have helped Pfizer to shift its headquarters to the U.K., thus resulting in a lower tax rate and significant savings that would boost its earnings. A 6% to 7% reduction in its tax rate could potentially help Pfizer save up to $1 billion. Additionally, Pfizer states that it only keeps 10%-30% of short-term funds in the U.S. tax jurisdictions, with the remaining funds kept overseas. Repatriation of these funds in the U.S. would have implied a significant tax liability for Pfizer. The company wanted to circumvent this issue by shifting its tax base. Although the recent changes in the U.S. tax rules seem to have nullified this advantage, there is no doubt that Pfizer wants to stick to some financial discipline. In fact, its current CEO has created a lot of shareholder value since he took over and a large part of that has come from cost optimization and financial discipline.

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The FDA recently granted approval for Pfizer's ( PFE ) Duavee, which has been developed by its wholly-owned subsidiary Wyeth in collaboration with Ligand Pharmaceuticals Inc. [1] The drug introduces a novel approach to treating hot flashes in menopausal women, and is also approved for the treatment of postmenopausal osteoporosis (common bone disease due to low estrogen levels). Unlike other drugs in the market, Duavee pairs conjugated estrogen ( CE ) with an estrogen agonist/antagonist (also known as a selective estrogen receptor modulator). The drug has the advantage of protecting uterus lining against hyperplasia, which increases risk of cancer of uterine lining and can happen with estrogen-only treatments. [1]

Given the reduction in cancer risk, we expect the drug to gain traction. There are approximately 33 million women in the U.S. between the ages of 45-59 (menopausal), and most of them experience hot flashes. [ 1 ] The quality of life can get significantly affected if this common condition is left untreated. Pfizer's existing drug Premarin, which primarily consists of conjugated estrogen, earned over $1 billion in revenues in 2012. We expect Duavee to cannibalize some of Premarin's sales starting from the first quarter of 2014. Furthermore, given that Pfizer is a well diversified company with several other major drugs, Duavee's success will lead to only a small incremental value add.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.