Would Pfizer Buying GlaxoSmithKline Make Sense?

Over the past five years, Pfizer (NYSE: PFE) and its shareholders have witnessed its stock price ascend by approximately 125%, a better than 30% outperformance of the broad-based S&P 500.

The Pfizer conundrum
What makes this outperformance so unique and strange is the fact that growth stocks are typically the most prominent outperformers during a bull market, while income plays and mature growth opportunities, such as Pfizer, often underperform the broad market.

To make matters even more confusing, patent exclusivity losses have hit Pfizer hard. Since 2010 Pfizer's revenue has precipitously declined as key therapies such as cholesterol-fighting drug Lipitor, anti-inflammatory Celebrex, and COPD drug Spiriva have lost exclusivity in important regions. In fact, based on the midpoint of Pfizer's estimated $44 billion-$46 billion in sales in 2015 (inclusive of negative currency effects), Pfizer's revenue will have dropped by a third (about $22 billion) in just five years.

Cost-cutting has certainly been a help for shareholders, but Pfizer has done everything within its power to keep them content through impressive shareholder returns. Between 2011-2014 Pfizer returned nearly $65 billion to investors via dividends and share repurchases. In just the first quarter of this year it met its full-year share repurchase amount of $6 billion, and it's on pace to give back more than $7 billion in dividends to investors. Overall its shareholder yield is well over 6%, which has helped buoy its share price.

Unfortunately, Wall Street wants more, and Pfizer's management knows this.
Pfizer has made no secret that it's looking to make acquisitions. CEO Ian Read in a conference call with analysts was quoted as saying, "I think the organization is agnostic to the size of [business development, or BD]. It has to be BD that will move the needle. And I'm not concerned about doing a large transaction if the value is there for shareholders."

Would buying GlaxoSmithKline make sense?
But would purchasing U.K.-based pharmaceuticals giant GlaxoSmithKline (NYSE: GSK) really make sense and "move the needle?" According to one Wall Street analyst, it would!

Gregg Gilbert of Deutsche Bank recently noted in a research note to investors, as reported by Bloomberg, that acquiring GlaxoSmithKline would be "materially accretive," and that it would "unlock access to its balance sheet and improve its tax situation."

The obvious attraction to this deal would be the tax implications. Tax inversion deals were extremely popular among the healthcare sector in 2014 due to the relatively high corporate tax rates in the U.S., which can range as high as 40%. In fact, the U.S. boasts the second highest peak marginal corporate tax rate of any country in the world. Buying a comparably sized but slightly smaller rival in an abroad market with a lower corporate tax rate would allow Pfizer (or any U.S. multinational for that matter) to move its corporate headquarters abroad and net hundreds of millions, or perhaps more than a billion, in tax benefits.

Of course, the United States has altered the way tax inversions are accounted for, and it isn't quite as lucrative as it was a year ago for U.S. multinationals. Still, purchasing Glaxo would certainly save Pfizer money come tax time.

In addition, combining Glaxo and Pfizer would presumably result in substantial drug development and administrative savings. With a number of overlapping development programs, including respiratory, which is GlaxoSmithKline's bread and butter, my estimation is the combination could result in peak savings that could approach $1 billion per year.

To add, having a number of overlapping therapeutic focuses would help, too.

GlaxoSmithKline recently completed a deal that made it one of the leading vaccine companies in the industry. Pfizer, in turn, has found incredible success with its Prevnar vaccine line. Buying Glaxo would truly solidify the combined company as a vaccine powerhouse.

Both also have a strong history in respiratory product development. GlaxoSmithKline is counting on four co-developed COPD/asthma products (Breo, Anoro, Incruse, and Arnuity) to drive growth over the next decade, which would fit nicely with Pfizer's product portfolio.

In reality, probably not
Although clear cost and research synergies exist, my belief is that this isn't a deal that's likely to come to fruition.

For starters, as Read noted above, Pfizer is after acquisitions that will "move the needle." Adding Glaxo would definitely broaden Pfizer's product portfolio and boost its sales, but Glaxo's bottom-line is facing a steep haircut in the coming years.

GlaxoSmithKline's leading product is Advair (known as Seretide abroad), which is a long-term maintenance treatment for COPD and asthma patients. Once an $8 billion per year drug, Advair sales have begun to shrink now that it's lost patent exclusivity. Though to be clear, it as of yet doesn't have any generic competition on the market. However, by next year a generic version of Advair is expected to hit pharmacy shelves, all but dooming Glaxo and Advair to a steep upcoming decline in sales.