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Pfizer Deal Still in Sight as Glaxo, Actavis Beckon: Real M&A 2014-08-04 23:09:31.387 GMT

(For a Real M&A column news alert: {SALT REALMNA <GO>}.)

By Cynthia Koons and Tara Lachapelle Aug. 5 (Bloomberg) -- After being rejected by AstraZeneca Plc, Pfizer Inc. still has a chance to clinch the drug industry’s biggest deal. While Pfizer shelved plans in May to buy the U.K. company in a record-setting transaction, its plan B could be an even larger target, $118 billion GlaxoSmithKline Plc, according to Berenberg Bank. A takeover of London-based Glaxo, which has gotten almost 10 percent cheaper in the past two weeks, would give Pfizer a lung-drug business and more vaccines. Another possibility, Irish-domiciled Actavis Plc at $57 billion, would offer a pipeline of new products and generic medicines. Either one may allow the New York-based company to move its headquarters abroad and lower its tax rate. In hunting for a deal, Chief Executive Officer Ian Read is looking to reduce taxes and restock a dwindling stable of patent-protected drugs. Without an acquisition, it will have almost no revenue growth over the next decade, analysts’ estimates compiled by Bloomberg show. Rather than falling back on share repurchases to boost earnings, Pfizer should have done a deal by now, SunTrust Banks Inc. said. “If they’re willing to go after AstraZeneca, they can obviously go after other sizeable targets,” Kevin Kedra, an analyst at Gabelli & Co., a unit of Gamco Investors Inc., said in a phone interview from Rye, New York. “There’s not much to limit Pfizer except finding a deal that makes sense.”

Deal Motivation

The combination of cost savings, low borrowing rates and reduced taxes make the case for an acquisition, Kedra said. With U.S. lawmakers threatening to introduce legislation to thwart tax inversion moves, “there’s a lot of motivation to have a deal happen now,” he said. Representatives for Pfizer, Actavis and Glaxo declined to comment. A representative for AstraZeneca said the drugmaker is focused on executing its strategy and can’t speculate on Pfizer’s intentions. The prospect of lowering taxes has driven a flurry of deals in the past year. American drugmakers pay a 35 percent rate on all earnings, whether made here or abroad, while foreign companies pay that rate only on profits they earn in the U.S. While the $117 billion acquisition of AstraZeneca would have made it possible for Pfizer to move to a lower tax jurisdiction and gain a robust pipeline, there are other possibilities. “We continue to aggressively look at all types of business development, regardless of size, that we believe would add value to shareholders,” CEO Read said on a conference call last week.

Glaxo Perks

A takeover of Glaxo would offer the tax benefits of the AstraZeneca deal, and a few additional perks as well. Combining the two drugmakers’ vaccines businesses, for example, would create a “genuinely world class” vaccine division, Alistair Campbell and other analysts from Berenberg wrote in an Aug. 1 report. Both Pfizer and Glaxo have segregated older drugs into established-products portfolios. Pfizer has already signaled an interest in divesting that piece, which contains medicines that have lost patent protection and are sold -- or about to be sold -- against generics. Merging it with Glaxo’s unit would allow for cost-cutting and then an eventual spinoff, the Berenberg analysts said. Political pressure in the U.K. could make it hard for Pfizer to consummate a deal with Glaxo, according to Damien Conover, a Chicago-based analyst at Morningstar Inc.

Pushing Back

If the AstraZeneca transaction “caused a lot of pushback from the government on the U.K. side, Glaxo would cause more,” Conover said in a phone interview. “It’s a little more of a heritage in the U.K., and it’s a bigger company than AstraZeneca.” AstraZeneca was valued at $93 billion yesterday, versus Glaxo’s $118 billion. Pfizer also could consider a deal with Actavis, the world’s biggest generic-drug maker by its $57 billion market value. It acquired Forest Laboratories Inc. earlier this year for $24 billion, after subtracting net cash, which added brand-name drugs such as the Alzheimer’s treatment Namenda and blood- pressure pill Bystolic. “It would make much more strategic sense for them to take a company like Actavis that has an established branded and generics component,” John Boris, an analyst at SunTrust, said in a phone interview. “They not only get a significant pipeline to inject in their U.S. franchise, they also get a very meaningful generics franchise.”

Actavis Appeal

Adding to Actavis’s appeal is its partnership with Amgen Inc. to develop biosimilars, copies of complex biological drugs which can earn fatter margins than traditional generic medicines, said Gabelli’s Kedra. “It could be an attractive opportunity for Pfizer to pick up the Actavis pipeline and maybe partner with Amgen on what could be a promising field of new drugs,” he said. Some shareholders say they’d rather see Pfizer use its cash to repurchase stock than make a bet on a large acquisition. Pfizer had about $34 billion of cash and equivalents as of the end of March. Its bid for AstraZeneca was 45 percent cash and 55 percent stock. “We prefer buybacks over takeovers,” said Barry James, who helps oversee $5.5 billion as president of James Investment Research Inc., a Pfizer shareholder in Xenia, Ohio. “I can’t say from a strategic point of view if a takeover would be good, but in the shorter term they rarely work well for shareholders, which is our chief concern for our clients.” A Bloomberg News analysis last year found that about two- thirds of company takeovers exceeding $20 billion since 1996 -- including Pfizer’s merger with Pharmacia Corp. -- generated losses for the acquirers’ shareholders.

Double-Whammy

In its dealmaking, Pfizer should focus more on replenishing its pipeline than reducing its tax rate, according to Tony Scherrer, director of research at Seattle-based Smead Capital Management, which oversees $957 million and owns Pfizer stock. He’d prefer that Pfizer repatriate some of its overseas cash, which would give the company more options for how to spend it. “They would open up their options if they had the cash here domestically,” Scherrer said in a phone interview. “There’s a lot of good stuff here that could be potentially interesting to them that I think maybe they aren’t looking at as hard because they’re trying to get this double-whammy upside.”

For Related News and Information: Pfizer Ponders Next Move as $117 Billion AstraZeneca Bid Fails NSN N6721G6VDKHT <GO> Pfizer CEO Is Impatient for Tax Reform as He Hunts for Deals NSN N9HPKY6TTDSS <GO> Tax-Inversion Takeovers Deliver Market-Beating Returns: Real M&A NSN N7BYU46KLVRJ <GO> Real M&A columns: NI REALMNA <GO> Top deal stories: DTOP <GO>

To contact the reporters on this story: Cynthia Koons in New York at +1-212-617-5253 or ckoons@bloomberg.net; Tara Lachapelle in New York at +1-212-617-8911 or tlachapelle@bloomberg.net To contact the editors responsible for this story: Beth Williams at +1-212-617-2307 or bewilliams@bloomberg.net; Reg Gale at +1-212-617-2563 or rgale5@bloomberg.net Whitney Kisling

Stock cools for company working on Ebola treatment

Shares of the Canadian biopharmaceutical company working on an Ebola virus treatment — which soared 66 percent in recent days — are cooling off Monday morning. Vancouver-based Tekmira Pharmaceuticals, which is developing TKM-Ebola under a $140 million contract with the Department of Defense, saw its shares spike to $16.70 in the first 20 minutes of trading — that’s up 66.5 percent from its closing price of $10.13 just five trading sessions before. But then Tekmira shares did an about-face and fell to $13.86 in the next 50 minutes. In the late morning, they stood at $14.05, down 1.3 percent in very heaving trading. Despite mainly positive drug trials, the testing of Tekmira’s TKM-Ebola was placed on hold in July by the Food and Drug Administration and it likely won’t be removed from regulatory hold status until the end of the year, Jason Kolbert, head of health care research at Maxim Group, wrote in a report last week. Tekmira had been testing its Ebola treatment in animals — and it had been having success. “TKM-Ebola protected 100 percent of the non-human primates previously infected with lethal doses of Zaire Ebola virus,” Kolbert wrote in his report, citing a report in Lancet, a medical journal. “The 100 percent efficacy has not previously been shown with any other treatment,” Kolbert noted in his report. The analyst has a buy recommendation on Tekmira with a 12-month price target of $23.00.

Closing Market Summary: Cyclical Sectors Send Stocks Higher

The stock market kicked off the new trading week on an upbeat note despite enduring a shaky start to the session. The S&P 500 settled higher by 0.7% with nine sectors ending in the green.

Equity indices climbed out of the gate amid upbeat action in Europe where Portugal's Banco Espirito Santo received bailout funds over the weekend. While the actual need for a bailout was not a positive in itself, the news calmed some fears about the stability of the European banking system.

Despite the opening strength, the key indices were back in the red during the first 90 minutes of action, but the outperformance of influential sectors like consumer discretionary (+1.0%), financials (+0.8%), and technology (+0.7%) invited dip-buyers into the fold. After a range-bound first half of the session, the indices spent the afternoon in a steady climb to new highs.

Overall, cyclical sectors fared better than defensively-oriented groups with five growth-sensitive sectors ending ahead of the broader market. The energy sector (+1.6%) was an early laggard, but surged into the lead in the afternoon after Colorado officials announced the formation of a task force aimed at minimizing regulatory conflicts in the industry. For its part, crude oil rose 0.4% to $98.27/bbl.

Like energy, the consumer discretionary sector (+1.0%) also added at least 1.0%. The group received all-around support as carmakers, homebuilders, and retailers rallied. Shares of Ford (F 17.02, +0.21) and General Motors (GM 33.61, +0.17) posted respective gains of 1.3% and 0.5% in reaction to strong July sales, while the iShares Dow Jones US Home Construction ETF (ITB 22.36, +0.22) added 1.0%. With regard to retail stocks, the SPDR S&P Retail ETF (XRT 84.57, +0.93) advanced 1.1%, but Michael Kors (KORS 77.01, -4.82) lost 5.9% after its disappointing outlook for Q2 overshadowed its above-consensus results and upbeat full-year guidance.

Elsewhere, the top-weighted S&P 500 sector—technology (+0.7%)—ended in line with the benchmark index. Large cap listings displayed broad strength with Google (GOOGL 582.27, +8.67) and Microsoft (MSFT 43.37, +0.51) both adding near 1.3%, while Apple (AAPL 95.59, -0.54) lagged. The largest tech stock shed 0.6%.

Even though most cyclical groups outperformed, the industrial sector (+0.3%) could not keep pace. Defense contractors pressured the sector (PHLX Defense Index -0.2%), while transport stocks struggled intraday. The Dow Jones Transportation Average added 0.4% to avoid its third consecutive decline.

On the countercyclical side, consumer staples (+0.4%), health care (+0.5%), and telecom services (+0.6%) benefitted from the afternoon rally, while the utilities sector (-0.6%) spent the entire trading day in the red to widen its third quarter loss to 7.1%.

Treasuries registered modest gains with the 10-yr yield slipping one basis point to 2.49%.

Participation was a bit below average with 661 million shares changing hands at the NYSE.

Tomorrow, June Factory Orders ( consensus 0.5%) and the ISM Services Index for July (consensus 56.5) will both be reported at 10:00 ET.

* S&P 500 +4.9% YTD  * Nasdaq Composite +5.0% YTD  * Dow Jones Industrial Average UNCH YTD  * Russell 2000 -3.3% YTD