Mega-mergers are in Pfizer’s DNA

Pfizer was built on big deals and, make no mistake, another mega-merger will come. Bristol-Myers Squibb is favourite to become the next target, though when any move might be made is another question entirely.

Ironically, given that US tax changes were supposed to boost M&A, the reforms could be a factor in staying chief executive Ian Read’s hand; making significant domestic redundancies so soon after receiving a huge windfall would not sit well with Washington. Still, comments made by Pfizer executives last month, and yesterday’s filing for a potential mixed-shelf offering, continue to stoke the flames of speculation, and at some point Mr Read will act.

Asked alongside fourth-quarter results last month whether Pfizer could still see value in large-scale M&A, Mr Read’s response was pretty unequivocal. Further consolidation among the big players will happen, and Pfizer will play a part, he said.

“We have a core competency in consolidation of large companies into Pfizer. If there is an opportunity … I expect that Pfizer would be at the forefront of it,” he told analysts and investors.

The comments came with the usual caveats – creating value for shareholders was paramount, the company felt under no need to act, and small as well as big deals are of interest. Mr Read also declined to say when then next wave of consolidation might occur or what might set it off, though he cited consolidation in the payer network and governments’ attempts to bring down healthcare costs as drivers.

A filing for a mixed shelf offering yesterday spurred talk that Pfizer might be gearing up to act – the shelf allows the company to raise money via various means very quickly.

Uncomfortable optics

Notably, Mr Read did not mention tax reform as a driver of the coming consolidation; many expect these changes to boost deal making. Indeed, Mr Read made headlines last summer when he blamed lack of progress in Washington for Pfizer’s decision to put the brakes on large transactions.

It is not unusual for business leaders to put pressure on politicians for their own ends. But it has not gone unnoticed that changes in the US tax code and the repatriation window have been hugely beneficial to the corporate world.

Critics of the reforms are already pointing to a substantial jump in share buybacks, distributing offshore earnings straight to shareholders, something that has certainly been seen in pharma (Biopharma promises a pay day as offshore reserves open up, February 8, 2018).

Should Pfizer make a move on Bristol-Myers job cuts would be inevitable, which would make for uncomfortable optics. If it looks like US redundancies were made possible in part by a reform for which Mr Read pushed hard, Pfizer could face awkward questions.

Of course concluding that optics might work against a Bristol bid depends on whether one believes that Pfizer executives care much about such things. Their bruising experiences during the failed attempted takeovers of Astrazeneca and Allergan suggest not. The latter was scuppered by the brash admission that the deal was all about tax avoidance, while in the UK Pfizer failed to realise the implications of being painted as the bad guy.

Waiting for Bristol?

There are other reasons why Pfizer might be holding off. It might want to wait and see how the immuno-oncology space plays out in the next few months.

Bristol-Myers’ position here is precarious, and though it claimed a victory in first-line lung cancer earlier this month the future of this extremely lucrative space remains unclear (Bristol-Myers turns alchemist to get lung cancer win, February 5, 2018).

Citi analysts made a bold call last week by claiming that these lung cancer data, and Bristol's huge deal with Nektar over a next-generation I-O asset, increased the chances of a Pfizer bid emerging. They also pointed out that Pfizer’s own immuno-oncology work had left it an also-ran, which in itself is a motivation that should not be underestimated.

But neither can Mr Read’s desire to do another big deal. More than any other pharma major Pfizer has used mega-mergers to drive its top line, and a look at the company's share price over the past 10 years suggests that investors are not entirely unhappy with the strategy.

Mega-mergers are in Pfizer's DNA, and it is only a matter of time before the company strikes again. 

To contact the writer of this story email Amy Brown in London at [email protected] or follow @ByAmyBrown on Twitter