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Do Generic Drugs Have Pfizer On the Run?

2 May 2014 in Trading Ideas

It would be the largest healthcare company in the world.

US-based Pfizer has proposed buying AstraZeneca for about $98.7 billion in a deal that would blow away what would become the industry’s second-largest takeover – that would be Pfizer’s $64 billion purchase of Wyeth in 2009.1

AstraZeneca has spurned the offer as too low, and Pfizer is now in the position of “considering its options.”

Ironically perhaps, just last week we saw a fairly tepid profit report by Astrazeneca, which reported a 50% drop in net income, due largely to the impact of generic competition for some of its best-selling drugs. As the Wall Street Journal put it, the company has been struggling with one of the industry’s worst “patent” cliffs,” or lower-cost competition to its patented drugs including best-selling statin Crestor and antipsychotic Seroquel.2

 

Of course, Pfizer itself has felt the pinch of generic drug competition – so much so, in fact, that it is reportedly considering splitting itself into three companies: two would be growth-oriented companies, plus what Pfizer is calling a “global established pharmaceutical” division, which sells drugs that have lost or soon will lose patent protection, including cholesterol-fighter Lipitor, the pain-killer Celebrex and Viagra, for erectile dysfunction.3

Presumably then, if this deal with AstraZeneca is completed, then at some point down the road, Pfizer could offload a bevy of drugs into a third company that continue to generate revenue but whose growth days are behind it.

What analysts believe you’d see in a best-case scenario is a sort of combined Pfizer and AstraZeneca structure, most likely represented as two high-growth companies divided by some sort of specific drug focus.

From Pfizer, you’d get what Barron’s called a “decent” drug pipeline, led by a new breast-cancer drug and a pneumonia vaccine targeted to adults. The company also has a new rheumatoid-arthritis drug, which has had disappointing sales so far. But Barron’s suggested it could gain traction because it has the advantage of being a pill, as opposed to the injectable drugs that now dominate the market.

A deal with AstraZeneca would help Pfizer add early-stage drugs in a field of cancer treatments that use the body’s own immune cells to recognize and attack tumors. As Barron’s pointed out, growth concerns have indeed kept a lid on Pfizer’s stock in the past year as investors have favored the stocks of drug makers that are involved in this very area, called immuno-oncology. In this area, Pfizer is way behind, Barron’s said.

Drug pipelines aside, another key element – and not a small one – of a potential Pfizer-AstraZeneca marriage would be the relocation of Pfizer outside the US for tax purposes. A merger would allow Pfizer to use some $70 billion of cash it has built up overseas that would be subject to a significant tax hit if brought back to the US, and keep that cash on the books within the combined company structure incorporated in England, presumably at a lower tax rate. However, one could wonder if the focus on tax savings is just another piece of the fallout from the profit impact from generic drug competition.

For one investment alternative related to generic drug stocks, consider a look at our Drug-Patent Cliffs motif, a portfolio of generic drug manufacturers competing in this industry. It is down 1.7% in the past month but has risen 55.8% in the past 12 months. During those same respective time periods, the S&P 500 is up 0.5% and 20.4%.

1Drew Armstrong and Oliver Staley, “Pfizer Still Wants AstraZeneca After Bid Rejected,” Bloomberg.com, April 28, 2014, http://www.bloomberg.com/news/2014-04-28/pfizer-confirms-proposing-98-7-billion-astrazeneca-deal.html.

2Hester Plumridge, “AstraZeneca Earnings Dented by Generic Competition,” WSJ.com, April 24, 2014.

3Andrew Bary, “Assessing Pfizer’s Future,” barrons.com, April 26, 2014.

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