Several weeks ago, I offered a scenario where drug giant Pfizer (NYSE:PFE) would trade at $45 assuming its $118 billion buyout offer for AstraZeneca (NYSE:AZN) was approved. Not everyone agreed. But as fate would have it, we will never get a chance to find out.
This morning, tired of being turned down and -- seemingly -- being milked for more money, Pfizer dropped its bid. I don't know about you, but I'm glad for Pfizer's shareholders that this dog-and-pony show is finally over. But it's not because I believe Pfizer is better off. In fact, it's quite the contrary.
First, the good news; Pfizer's decision ends what had turned into a public feud between two of the world's biggest pharmaceutical companies. The fact that this deal became a political issue over jobs and corporate tax maneuvers didn't serve the interest of either company, especially Pfizer. But this don't completely shut the door on this dance.
According to British rules, both companies will now enter a so-called "cooling-off period," which allows AstraZeneca to invite Pfizer back to the negotiating table after three months. But Pfizer has to wait six months before it can make another offer. Whether this happens or not remains to be seen. But the more pressing question is how much does AstraZeneca believe it's worth.
This deal was all about money, which Pfizer had raised from $100 billion to roughly $106 billion, leading to its recent offer of $118 billion. Commenting on Pfizer's withdrawal, AstraZeneca Chairman Leif Johansson said:
"We note Pfizer's confirmation that it no longer intends to make an offer for AstraZeneca. We welcome the opportunity to continue building on the momentum we have already demonstrated as an independent company.
"We are fully focused on the delivery of our strategy. We have attractive growth prospects and a rapidly progressing pipeline. In the coming months, we anticipate positive news flow across our core therapeutic areas, which underpins our confidence in the long-term prospects of the business."
"I believe this will create significant value for our shareholders, employees and patients who will benefit from our life-changing medicines."
As most industry experts predicted, Pfizer said it would not go the "hostile" route and take its offer directly to AstraZeneca shareholders. Ian Read, Pfizer's chairman and chief executive added:
"We continue to believe that our final proposal was compelling and represented full value for AstraZeneca based on the information that was available to us."
Amid all of the merger discussions, however, investors appeared broadly indifferent. Unsure of what AstraZeneca brought to the table. But it wasn't just about AstraZeneca's worth per se, it was also about Pfizer offsetting its own headwinds.
Recall, several months ago, a federal court rejected a key patent for Celebrex, which is used to treat illnesses related to osteoarthritis, rheumatoid arthritis and juvenile rheumatoid arthritis. Celebrex generated roughly $3 billion in revenue in 2013, and ranks as Pfizer's fourth-best selling product. Even more impressive is that the drug had the potential to exceed gross margins of 90%. This means that Pfizer will be able to earn almost $1 for each dollar it generates in revenue.
But until Celebrex receives regulatory approval, the loss of AstraZeneca will appear bigger. While Pfizer management continues to do what is necessary to offset pipeline weakness, the company just posted a 15% year-over-year decline in net income, which was due to ongoing product losses of exclusivity and co-promotion expirations. AstraZeneca would have offset the noticeable weakness in Pfizer's pharmaceutical businesses.
I won't deny that Pfizer's management remains committed to pursue revenue growth opportunities and deliver long-term value to shareholders. But if AstraZeneca was looking for a sweeter deal, it's not as if Pfizer didn't have the firepower to close this deal and inject itself with the growth it needs. It may be a quarter or two before investors realize this, but neither company is better off without each other, especially Pfizer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's healthcare sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.