Pfizer’s attempt to buy AstraZeneca over the last 6 weeks has been a total failure. As the saga progressed, the real question in my mind shifted from all the political wrangling and negotiation to why Pfizer seemed so desperate to consummate a deal. For those unfamiliar with the full story, here is a summary from the WSJ last week:
Pfizer had been chasing AstraZeneca since November in an effort to create the world’s biggest pharmaceutical company. Pfizer last proposed a deal valued at $120 billion. But AstraZeneca was able to run out the clock on Monday’s deadline under U.K. takeover rules for reaching an agreement. Under those rules, Pfizer could submit another offer for AstraZeneca in six months.
Pfizer Chairman and Chief Executive Ian Read didn’t rule out resuming discussions with AstraZeneca but said Pfizer was going to focus on “lots of great opportunities” for growth inside the company and to look at other potential deals.
“We are now moving on. We have no idea whether we’d be interested in AstraZeneca at any point in the future,” Mr. Read said in an interview.
Some AstraZeneca shareholders criticized Pfizer’s approach as driven by tax and financial considerations rather than business advantages. They urged AstraZeneca to stand firm against Pfizer.
Other investors considered Pfizer’s final price to be attractive and pushed for talks, however. Meanwhile, some politicians in the U.K. voiced concerns about the potential loss of valuable science jobs.
The “tax and financial considerations” refer to the fact that PFE’s corporate tax rate would be reduced by 6-7% per year if the company re-located to the U.K. (possible through buying AZN). Besides the tax benefits, Pfizer’s bid for AZN is a move by management to improve its own drug pipeline amidst disappointing results from the company’s own R&D over the past few years.
PFE has a lower level level of annual sales today (around $49 billion) than it did in 2004 ($52 billion). The company has lost the sales from Lipitor after the drug went off patent, and management is struggling to replace those lost revenues. The stock has actually performed well over the past few years, though almost every stock in the market has seen a bid. The actual fundamental situation at the company has hardly improved.
I wrote about PFE more than a year ago in a NTT post with the following conclusion:
However, PFE’s 10 year decline in stock price from 1999-2000 to 2009-2010 finally attracted enough value buyers to turn around the stock’s trajectory. Here is the 10 year chart of the trailing P/E in Pfizer:
Here is the key – PFE is priced at the same multiple as its 2005-2006 valuation range, with a similar earnings profile (again 1.50-2.50 for the past 10 years). In my view, there is a simple pro and a con to this situation. Pro: Investors are much more desperate for yield today than they were in 2005-2006, rendering PFE’s stable dividend yield an attractive alternative. Con: People who bought PFE in 2005 and 2006 saw their investment cut in half in 3 years. PFE is a surprisingly similar company to what it was the last time it traded at $30 in 2004. Whether that’s bullish or bearish is less clear.
PFE has underperformed the broader health care sector and the stock market for more than a decade now. The stock is priced at around 13x, but EPS growth expectations of only around 1%, and negative sales growth expected. PFE’s failure to acquire AZN last month led to a breakdown below the $30 pivot level, which has important long-term significance:[caption id="attachment_41137" align="alignnone" width="600"] PFE monthly chart, Courtesy of Bloomberg[/caption]
PFE traded above $30 for much of the 1998-2004 period, and traded under $30 for nearly the next decade until 2013. However, the long-term breakout looks at risk. On the short-term chart, PFE is now below both its 50 and 200 day ma’s, which are now both around $30.50:[caption id="attachment_41138" align="alignnone" width="600"] PFE daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
The $30.50 level also happens to be near where PFE closed the year in 2013.
Finally, implied volatility in PFE has declined over the past month as the acquisition looked less and less likely:[caption id="attachment_41139" align="alignnone" width="600"] PFE 30 day implied vol, Courtesy of Bloomberg[/caption]
Fundamentally and technically, PFE looks like a dud to us. AstraZeneca’s rejection of PFE’s bid was simply one more illustration that Pfizer has quite a weak hand relative to the rest of the industry. With options prices getting cheaper, we’re looking to buy a put if PFE tests the $30.50 resistance level in the coming weeks.