Pfizer will deliver a deal, whatever Mr Read needs
In the last few years Pfizer’s chief executive Ian Read has tantalised – and surprised – investors by proposing two "value creating" exercises. The first was a plan to break up the drug maker into three divisions, and the second an attempt to increase the size of the company substantially, through a bid for AstraZeneca.
Neither has materialised, and yet – to the apparent surprise of Mr Read – the world remains obsessed with Pfizer’s intentions. He must of course realise that his mega-merger attempt and proposed carve-up leads to the logical conclusion that the company both wants and needs a big shake-up. So he must now deliver something like this, otherwise investors will rightfully begin to focus more attention on Pfizer’s sluggish growth prospects.
These were apparent yesterday as the drug maker revealed disappointing revenue guidance for the coming year. Although an unusually large hit from exchange rates is partly to blame, patent losses are also biting. Plus, the company is ramping up both R&D and SG&A, further diminishing its power to protect earnings growth.
Much of this spending is going on recent launches and top pipeline prospects; however, it is clear that Pfizer’s track record on innovation is far from industry leading. The launches of Eliquis and Xeljanz have disappointed – the latter has failed even to make it to market in Europe – and while some older franchises like Prevnar and Enbrel are doing well and a couple of novel cancer drugs have made their mark, the gaping revenue holes gouged by the likes of Lipitor and Celebrex have yet to be filled.
High hopes have been pinned on the breast cancer treatment Ibrance (palbociclib), which represents the brightest spot on the horizon. And while much was made of its immuno-oncology pipeline yesterday the fact remains that Pfizer trails the competition in this field, a situation in which it also finds itself in another major novel drug class, the cholesterol-lowering PCSK9 antibodies.
Considering these prospects it is perhaps not surprising that Mr Read would be focusing on deal-making. There is certainly much more historical evidence of an addiction to deals at the company than there is for internal R&D prowess.
As such, it is also no wonder that evidence of its commitment to business development and M&A is being sought. A large proportion of the questions asked by analysts on the quarterly call yesterday were on these topics – no doubt reflecting the thoughts and demands of the wider investor community.
As for what Pfizer actually does, another move on AstraZeneca looks unlikely. Particularly as, arguably, the bid failed more because of a strategic screw-up rather than Pfizer's ability or willingness to pay; choosing to emphasise tax savings at a time when inversions and fear of foreign raiders were raising political ire in both the US and UK was an incredibly bad way to frame the deal.
However, there are plenty of other big targets out there – Mylan, Teva and Actavis among others have been fingered in the press.
On the break-up strategy a decision has yet to be made, Pfizer said, leaving the impression that the right conditions had yet to be met. The implication remains that one or more of its divisions will be beefed up before this happens, and Mr Read chose to mention that he is biased towards transactions with a potential for creating “near-term” value.
So while he may protest that “we don’t feel we need to do a big deal” – even that he is “mystified” that people believe Pfizer needs to do one – the fact is that everyone expects one. Maybe not the size of AstraZeneca, but something fairly transformational.
Of course another advantage to such a move is to keep investors’ eyes off the performance of the underlying business. Pfizer will struggle to stand still over the next few years, so distraction tactics could come in handy.
Another big deal will happen, sooner rather than later. Mr Read's biggest problem will be persuading any target that he is not desperate, with obvious implications for the price tag.
To contact the writer of this story email Amy Brown in London at [email protected] or follow @AmyEPVantage on Twitter