In a recent research note titled “Introducing PfizerKline” Deutsche Bank analyst Gregg Gilbert made a case for Pfizer (PFE, Financial) acquiring GlaxoSmithKline (GSK, Financial). According to the analyst, this acquisition will be “materially accretive” for Pfizer. It will also allow Pfizer to “unlock access to its balance sheet and improve its tax situation.” Pfizer's current tax rate is materially higher than its peers; and acquisition of GlaxoSmithKline, which is based in UK, can help it achieve tax inversion. Current low interest rate environment is also conducive for such a transaction.
In addition to GlaxoSmithKline, analysts have come up with various other names including AstraZeneca, Shire Plc. and Mylan NV as potential acquisition target. Pfizer’s organic growth is slowing and it is natural for Pfizer to look for inorganic growth routes. Any big acquisition can act as a meaningful catalyst for the stock which has remained rangebound over the last two years.
During the last few years, the company has lost significant revenue due to loss of exclusivity (patent expiry) and co-promote expiries from several high margin products like Lipitor Enbrel in Canada and the US, and the loss of Spiriva. The company was, however, able to maintain its operating margins by cutting costs. Over the last four years, Pfizer have taken approximately $5.5 billion out of from operating expenses. Management expects these ongoing expense reductions efforts to continue over the next few years.
In order to enhance shareholder returns during this tough period, Pfizer has returned about $64 billion to shareholders with share repurchases and dividends over the last four years. The company expects to return another $13 billion to shareholders in FY2015. Management expects FY2015 revenues will see a negative impact of $3.5 billion from loss of exclusivity on certain products and of $2.8 billion due to adverse changes in foreign exchange. They will be partially offset by nearly $2 billion of anticipated operational revenue growth in certain products like Eliquis, Xeljanz, Prevnar 13 Adult, Trumenba, Inlyta, Xalkori and Nexium 24HR.
Pfizer is trading at 16.5 times it FY2015 EPS. The company has a forward annual dividend yield of 3.30%. In the near term, patent expiry and forex headwind are expected to adversely affect the company's topline growth. However, the real promise for Pfizer's shareholders lies in the strength of its late and mid-stage pipeline, which will help it grow its revenues in the medium term. Further, any news around potential acquisition will also lift investor sentiments. Meanwhile the company's high dividend yield, cost cutting initiatives, share repurchases and low valuations are expected to provide support to the shares.
