Should Pfizer Attempt To Acquire AstraZeneca?

Apr.21.14 | About: Pfizer Inc. (PFE)

Summary

Pfizer recent overture to acquire Astra Zeneca makes financial sense.

The combined companies would be still be facing immediate difficulty in increasing revenues.

The combination is a long term play as the pipeline should bear fruit in the 2017 time frame.

There are three main levers a company can pull to enhance shareholder returns. The most frequently discussed revolve around paying a dividend which is a direct return on shareholders' capital. The second revolves around reducing shares outstanding via purchase of shares on the open market. When done properly, the remaining shares (ie float) is reduced, leading to each share being entitled to a greater percentage of the company's earnings. The third method revolves around purchasing a competitor to grow revenues and market share. The article below will discuss Pfizer (NYSE:PFE) recent overture towards Astra Zeneca (NYSE:AZN).

PFE is one of the largest pharmaceutical companies in the world with a market cap of over 193 billion dollars. The balance sheet shows over $30 billion in cash which gives PFE significant firepower to attempt to acquire a competitor. The issue for PFE has been the dreaded patent cliff, as they have been unable to grow revenue since their best selling product known as Lipitor lost patent protection. As we can see from the table below, 2014 revenue will be far lower than the 67.8 billion reported in 2010. Clearly, four straight years of declining revenues are far from a favorable outcome. The shares have underperformed the broader market as they are unable to grow the top and bottom lines due to patent expirations.

2014 FINANCIAL GUIDANCE

Pfizer's 2014 financial guidance is summarized below.

Adjusted Revenues $49.2 to $51.2 billion

Adjusted Cost of Sales as a Percentage of Adjusted Revenues 19.0% to 20.0%

Reported Diluted EPS $1.57 to $1.72

Adjusted Diluted EPS $2.20 to $2.30

The life blood of all research based companies revolves around the intellectual protection of their products via patents. The loss of revenue becomes quite predictable once a major product comes off patent as we have seen above with the loss of patent protection on Lipitor. PFE major products patent protection is detailed below.

 
       

Drug

U.S. Basic Product Patent Expiration Year

Major EU Basic Product Patent Expiration Year

Japan Basic Product Patent Expiration Year

Viagra

2012

2013

2013

Enbrel

N/A

2015

2015

Celebrex

2014

2014

2019

Zyvox

2015

2016

2019

Lyrica

2018

2014

2022

Bosulif

2019

2019

N/A

Chantix

2020

2021

2022

Inlyta

2020

2020

2025

Xeljanz

2020

N/A

2025

Sutent

2021

2021

2024

Eliquis

2023

2026

2026

Prevnar 13

2026

2026

2026

Xalkori

2029

2025

2028

Click to enlarge

As we can see from the chart above, two of PFE major products will have lost or will be losing patent protection in 2014. The loss will further pressure revenue necessitating a bold move by management. The question now becomes is AZN the correct company to purchase along with how well do their existing products overlap with those produced by PFE.

TWELVE MONTHS 2013 and 2012

(UNAUDITED)

(millions of dollars)

 
                                               
 

WORLDWIDE

UNITED STATES

TOTAL INTERNATIONAL(NYSE:A)

 

2013

2012

% Change

2013

2012

% Change

2013

2012

% Change

 

Total

Oper.

Total

Total

Oper.

TOTAL REVENUES

$

51,584

 

$

54,657

 

(6%)

(4%)

$

20,274

 

$

21,313

 

(5%)

$

31,310

 

$

33,344

 

(6%)

(3%)

REVENUES FROM BIOPHARMACEUTICAL PRODUCTS:

$

47,878

 

$

51,214

 

(7%)

(4%)

$

18,570

 

$

19,708

 

(6%)

$

29,308

 

$

31,506

 

(7%)

(3%)

Lyrica

4,595

 

4,158

 

11%

13%

1,963

 

1,672

 

17%

2,632

 

2,486

 

6%

10%

Prevnar family

3,974

 

4,117

 

(3%)

(2%)

1,804

 

1,887

 

(4%)

2,170

 

2,230

 

(3%)

-

Enbrel (Outside the U.S. and Canada)

3,774

 

3,737

 

1%

4%

-

 

-

 

-

3,774

 

3,737

 

1%

4%

Celebrex

2,918

 

2,719

 

7%

9%

1,933

 

1,745

 

11%

985

 

974

 

1%

7%

Lipitor

2,315

 

3,948

 

(41%)

(40%)

432

 

932

 

(54%)

1,883

 

3,016

 

(38%)

(35%)

Viagra

1,881

 

2,051

 

(8%)

(8%)

1,132

 

1,135

 

-

749

 

916

 

(18%)

(17%)

Zyvox

1,353

 

1,345

 

1%

3%

688

 

665

 

3%

665

 

680

 

(2%)

2%

Norvasc

1,229

 

1,349

 

(9%)

(3%)

39

 

48

 

(19%)

1,190

 

1,301

 

(9%)

(2%)

Sutent

1,204

 

1,236

 

(3%)

(1%)

351

 

337

 

4%

853

 

899

 

(5%)

(3%)

Premarin family

1,092

 

1,073

 

2%

2%

1,001

 

977

 

2%

91

 

96

 

(5%)

(1%)

BeneFIX

832

 

775

 

7%

8%

395

 

358

 

10%

437

 

417

 

5%

7%

Vfend

775

 

754

 

3%

6%

61

 

89

 

(31%)

714

 

665

 

7%

11%

Genotropin

772

 

832

 

(7%)

(3%)

199

 

204

 

(2%)

573

 

628

 

(9%)

(3%)

Pristiq

698

 

630

 

11%

12%

540

 

493

 

10%

158

 

137

 

15%

20%

Chantix/Champix

648

 

670

 

(3%)

(1%)

343

 

313

 

10%

305

 

357

 

(15%)

(10%)

Refacto AF/Xyntha

602

 

584

 

3%

2%

123

 

106

 

16%

479

 

478

 

-

(1%)

Xalatan/Xalacom

589

 

806

 

(27%)

(22%)

30

 

38

 

(21%)

559

 

768

 

(27%)

(22%)

Detrol/Detrol LA

562

 

761

 

(26%)

(25%)

375

 

486

 

(23%)

187

 

275

 

(32%)

(29%)

Zoloft

469

 

541

 

(13%)

(5%)

44

 

68

 

(35%)

425

 

473

 

(10%)

-

Medrol

464

 

523

 

(11%)

(9%)

148

 

140

 

6%

316

 

383

 

(17%)

(15%)

Effexor

440

 

425

 

4%

4%

173

 

109

 

59%

267

 

316

 

(16%)

(15%)

Zosyn/Tazocin

395

 

484

 

(18%)

(18%)

172

 

217

 

(21%)

223

 

267

 

(16%)

(16%)

Zithromax/Zmax

387

 

435

 

(11%)

(5%)

7

 

12

 

(42%)

380

 

423

 

(10%)

(4%)

Fragmin

359

 

381

 

(6%)

(6%)

23

 

42

 

(45%)

336

 

339

 

(1%)

(1%)

Relpax

359

 

368

 

(2%)

(1%)

218

 

219

 

-

141

 

149

 

(5%)

(2%)

Tygacil

358

 

335

 

7%

8%

150

 

152

 

(1%)

208

 

183

 

14%

16%

Rapamune

350

 

346

 

1%

2%

201

 

185

 

9%

149

 

161

 

(7%)

(4%)

Inlyta

319

 

100

 

*

*

155

 

82

 

89%

164

 

18

 

*

*

Sulperazon

309

 

262

 

18%

19%

-

 

-

 

-

309

 

262

 

18%

19%

Revatio

307

 

534

 

(43%)

(41%)

67

 

312

 

(79%)

240

 

222

 

8%

11%

Cardura

296

 

338

 

(12%)

(7%)

4

 

5

 

(20%)

292

 

333

 

(12%)

(7%)

Xalkori

282

 

123

 

129%

134%

139

 

80

 

74%

143

 

43

 

*

*

Xanax

276

 

274

 

1%

2%

49

 

50

 

(2%)

227

 

224

 

1%

3%

Diflucan

242

 

259

 

(7%)

(4%)

3

 

4

 

(25%)

239

 

255

 

(6%)

(4%)

Toviaz

236

 

207

 

14%

14%

120

 

113

 

6%

116

 

94

 

23%

24%

Aricept

235

 

326

 

(28%)

(27%)

-

 

-

 

-

235

 

326

 

(28%)

(27%)

Inspra

233

 

214

 

9%

13%

6

 

5

 

20%

227

 

209

 

9%

13%

Caduet

223

 

258

 

(14%)

(7%)

23

 

33

 

(30%)

200

 

225

 

(11%)

(4%)

Somavert

217

 

197

 

10%

10%

52

 

46

 

13%

165

 

151

 

9%

9%

Neurontin

216

 

235

 

(8%)

(5%)

45

 

48

 

(6%)

171

 

187

 

(9%)

(5%)

Unasyn

212

 

228

 

(7%)

5%

1

 

2

 

(50%)

211

 

226

 

(7%)

5%

BMP2

209

 

263

 

(21%)

(21%)

209

 

263

 

(21%)

-

 

-

 

-

-

Geodon

194

 

353

 

(45%)

(45%)

84

 

214

 

(61%)

110

 

139

 

(21%)

(20%)

Depo-Provera

191

 

148

 

29%

31%

57

 

33

 

73%

134

 

115

 

17%

19%

Aromasin

185

 

210

 

(12%)

(9%)

12

 

14

 

(14%)

173

 

196

 

(12%)

(10%)

Xeljanz

114

 

6

 

*

*

112

 

6

 

*

2

 

-

 

*

*

Alliance revenues

2,628

 

3,492

 

(25%)

(24%)

2,267

 

2,620

 

(13%)

361

 

872

 

(59%)

(57%)

All other biopharmaceutical products

7,360

 

7,804

 

(6%)

(2%)

2,620

 

3,149

 

(17%)

4,740

 

4,655

 

2%

8%

All other established products

5,966

 

6,074

 

(2%)

1%

2,038

 

2,165

 

(6%)

3,928

 

3,909

 

1%

5%

REVENUES FROM OTHER PRODUCTS:

                     

CONSUMER HEALTHCARE

$

3,342

 

$

3,212

 

4%

5%

$

1,580

 

$

1,526

 

4%

$

1,762

 

$

1,686

 

5%

6%

OTHER

$

364

 

$

231

 

58%

57%

$

124

 

$

79

 

57%

$

240

 

$

152

 

58%

57%

Click to enlarge

Tables taken from the January 2014 8-K

The table below will detail the revenue breakdown of some of the key AZN products. The most notable are Nexium which will be losing patent protection in 2014 and Crestor which has patent protection through 2016. It is my belief that Crestor is the most interesting immediate product in AZN portfolio. PFE has extensive knowledge and goodwill built up in the cardiovascular field through its years of promoting Lipitor. I suspect PFE would be able to increase sales of Crestor based on the goodwill it has accrued over the years. The revenue generated from Crestor will help arrest some of the revenue decline that PFE has suffered through over the past couple of years. Interestingly, PFE has acquired the rights to market Nexium OTC from AZN. The product will be sold as an over the counter remedy and will be marketed by Pfizer's consumer division.

Name of Product

2013 sales in millions

2012 sales

Percent gain/loss

Crestor

5,622

6,253

(8)

Nexium

3,872

3,944

Roughly (1)

Symbicort

3,483

3,194

10

Seroquel

1,682

2,803

(39)

Seroquel XR

1,337

1,509

(12)

Synagis

1,060

1,038

2

Click to enlarge

The immediate issue with the merger revolves around revenue growth. Both companies are deeply challenged to growth their revenues over the next couple of years as they await the products in their pipeline to bear fruit. The following quote by Pascal Soriot, Chief Executive Officer of AZN demonstrates the challenge that AZN is currently facing.

"As expected, our financial performance for 2013 reflects the ongoing impact from the loss of exclusivity for several key brands. In the near term these headwinds will remain challenging, however I am confident that we can return to growth faster than anticipated and expect our 2017 revenues will be broadly in line with 2013.

In the absence of immediate revenue growth, what would posses PFE to make a move of this nature. Surely, the top staff of PFE must have some outstanding reasons for acquiring AZN. I believe the answer revolves around three critical factors that I will detail below.

The primary reason in my opinion revolves around acquiring AZN pipeline. The strength of a company's pipeline traditionally determines the future path of its revenue. In the case of AZN, they anticipate having 19 potential candidates in phase three trials in 2014-2015. While there is no guarantee that they will be approved, in my view the more candidates you have the greater chance you will have some approvals.

The second reason for the merger revolves around synergies; more specifically in this case cost cuts. By combining these two companies, I would expect there would be significant opportunities to reduce expenses by eliminating redundant roles. There may also be opportunities to consolidate some of the research and development spending. While no official comment has been made, I strongly suspect cost cuts along with a reduction in the workforce will be actively pursued.

The third reason for the merger is somewhat unique in that it revolves around taxes and prevailing interest rates. PFE currently has over $30 billion dollars in cash with the vast majority parked overseas to avoid US taxation. The assets are currently "trapped", as they need to stay overseas or face an immediate 35% tax if repatriated. Further complicating matters, interest rates are abysmally low worldwide,e which further behooves the company to do something creative with the funds. By simply leaving it collect what paltry interest it generates, the funds buying power will continue to diminish due to the effects of inflation.

In my view, the merger makes complete sense from a PFE shareholders perspective, as it is a creative way of using trapped funds. If I am a current employee or shareholder of AZN, I would be less than enthused. PFE represents a competitor that is trying to capitalize on AZN weakened standing in the market, to purchase AZN at a discount price. Once the merger is completed sometime in2015, PFE will be able to reap the rewards of the pipeline in the 2017 time frame. I currently do not hold a position in either company; however I will be quite interested to see how this story plays out. Thanks for reading and I look forward to your comments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.