Pfizer needs a tax inversion deal. Without one, it can't properly compete with overseas companies, simple as that. And if AstraZeneca doesn't want to play, Pfizer is willing to look elsewhere. Even if "elsewhere" means a generics company.
That's what executives told the high-profile Bernstein Research analyst Tim Anderson, according to a note to investors Thursday morning--basically confirming the deal talk that's been rumbling since Pfizer ($PFE) backed away from its AstraZeneca ($AZN) bid in late May.
With its cost-cutting program coming to a close, the company wants to slash its tax rate to get another efficiency boost--and to give it a better hand in playing for overseas M&A. European companies have had "a substantial advantage" making deals because of their lower tax burden, Pfizer figures (as noted by Anderson). Plus, it needs access to that cash it's storing overseas for tax-avoidance reasons.
An inversion deal can deliver all that. And the company's top brass apparently see several possibilities. An asset swap, for instance. It would have to be a big asset swap to meet the legal requirements for moving its "home" overseas, and portfolios and business units large enough are few and far between--but there are some opportunities, they told Anderson.
Then there's AstraZeneca, of course. Pfizer can't say much about that prospect because of U.K. takeover rules. Anderson figures it's "reasonably likely" that Pfizer will come back to try to parlay, but the analyst also says that Pfizer seems to suggest that AstraZeneca doesn't offer "a highly unique, must-have portfolio."
Hence the looking elsewhere. And, somewhat surprisingly, the company would consider a big generics player. That sort of deal, provided it's large enough to achieve an inversion, would not only satisfy Pfizer's craving for lower taxes, but also help beef up its established products business. And that's something Pfizer would like to do. In fact, if Pfizer really wants to spin off its Global Established Products unit in a few years, then it's going to have to bulk up in off-patent meds.
Plus, if Pfizer could fold a big portfolio of established products into its own infrastructure, it could cut costs. Biosimilars and hard-to-produce generics would be ideal, the execs suggested.
There's a "substantial possibility" that the generic unit would be better off as a standalone company," the execs told Anderson. But it needs a boost to make it a "full-fledged standalone business," the note states.
Buying AstraZeneca would do the trick, but so would buying a company like Actavis ($ACT), which is one of the targets that's been bandied about in recent weeks. In early August, Berenberg analysts touted GlaxoSmithKline ($GSK) as a merger partner.
Late last month, ISI Group analyst Mark Schoenebaum sent out a note revealing the results of a client survey--obviously not scientific--about which inversion buy Pfizer should make, given those three choices. AstraZeneca got about 47% of the vote, with Actavis at about 38%. Glaxo? Way down below 10%--about equal to those who said Pfizer shouldn't buy any of them.
Special Report: The top 10 pharma companies by 2013 revenue - Pfizer - AstraZeneca