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Pfizer Inc. Has AstraZeneca plc Or GlaxoSmithKline plc In Its Sights

Pfizer Inc., the world’s largest pharmaceutical company, is struggling to find growth. Just like many of its peers, the company is suffering as sales of legacy drugs slide due to the loss of exclusive manufacturing rights. 

So, to try and reignite sales, Pfizer’s management is on the warpath and CEO Ian Read is thinking big.  According to sources close to the company, Pfizer is weighing up two options for 2015 — a mega-merger or a mega stock buyback. 

A second attempt 

Pfizer tried its hand at a mega-merger last year when it made a £55 per share offer for AstraZeneca (LSE: AZN). Astra put up a fight to remain dependant and the deal fell through for several different reasons. 

When Pfizer walked away from the deal, star fund manager Neil Woodford estimated that the chance of Pfizer coming back for a second attempt would be 50/50. Although he also added that based on Astra’s future growth potential, it’s unlikely that Pfizer would be able to afford a buy-out price that would adequately compensate Astra’s shareholders. 

However, it has since emerged that Pfizer’s CEO likes the look of GlaxoSmithKline (LSE: GSK), which currently has a market value of £72.4bn (about $112.2bn), which is more than the £69bn offer Pfizer made for Astra last year. These rumours indicate that Pfizer may also be willing to offer a higher price for Astra.

With net debt of only $3.6bn at the end of the third quarter last year, compared to shareholder equity of $78bn, Pfizer certainly has plenty of room on its balance sheet to fund an acquisition. 

Stronger alone                         

Still, if Pfizer does try and make a move for either Glaxo or Astra, the US group is going to have fight on its hands. 

Indeed, ever since Pfizer made an initial bid for Astra last year, the UK based group has set out to prove that it is stronger alone. For example, during the past few months Astra has made significant progress developing several new key treatments, including Brilinta tablets, for patients with a history of heart attack.

Further, the company has eight key assets under development, which have critical milestones in development over the next 18 months. And there are as many as ten drug approvals are set for 2016.

If Pfizer does come back for a second attempt to get Astra, it’s this pipeline that will be the sticking point. With so much potential for growth over the next few years, if Pfizer wants to acquire Astra and the company’s industry-leading immuno-oncology portfolio, the US group is going to have to offer a knock-out price. 

On the other hand, Glaxo could be an easier target, but Pfizer would still have to compensate investors for the loss of future growth. This would come at a high cost. 

But overall it seems as if Pfizer is intent on doing a big deal this year, although it remains to be seen which company it will target.

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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.