Update: Pfizer Cannot Afford GlaxoSmithKline

Aug. 6.14 | About: Pfizer Inc. (PFE)

Summary

It is speculated that Pfizer is now looking for other companies to acquire including GlaxoSmithKline.

GSK is too richly valued for Pfizer, and it is more likely that Pfizer will once again pursue AstraZeneca as I predicted earlier.

It is reasonable for Pfizer to consider alternate targets after being spurned by AstraZeneca, but it still remains the best bet for Pfizer going forward.

There is speculation that with Pfizer's (NYSE:PFE) bid for AstraZeneca (NYSE:AZN) off the table for now, Pfizer is considering other large pharmaceutical companies to pursue such as GlaxoSmithKline (NYSE:GSK). In a previous article, I discussed that Pfizer needs to acquire a promising drug pipeline, such as the one AstraZeneca holds, to fuel future growth. Synergies with the acquired company in Pfizer's current areas of expertise would also allow it to offer shareholders more value once it spins off non-core assets like its generic drug business.

GlaxoSmithKline has a market cap of about $118 billion, which is close to Pfizer's final bid for AstraZeneca valued at $120 billion. However, it is important to keep in mind that AstraZeneca's market cap prior to announcement of Pfizer's interest in the company was only $81 billion. Pfizer's initial bid placed a 30% premium on AstraZeneca's stock price prior to announcement and its final bid placed a 45% premium. Accordingly, a 30% premium to GlaxoSmithKline's current valuation would be $153 billion. For a company with a market cap of $190 billion and only $35 billion in cash, Pfizer seems unlikely to be able to swallow a pill as large as GlaxoSmithKline.

Pfizer's desire for a tax inversion deal is high, but its options are limited. AstraZeneca still represents the best bet Pfizer has for ensuring future success by acquiring a strong drug pipeline and for exploiting tax savings that it says could amount to $1 billion annually.

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