Pfizer’s need for a deal becomes increasingly important amid earnings report

By Ransdell Pierson

NEW YORK (Reuters) – Pfizer Inc.’s sensitivity to cheaper generic drugs and a weak pipeline of experimental drugs will be on display on Tuesday when the company releases its quarterly report, reviving interest in a takeover of AstraZeneca Plc or other deals to bolster its offering.

The largest US drugmaker, whose laboratories have not created a single successful new drug in a decade, is expected to report significantly lower revenue in the second quarter.

While many industry observers expect Pfizer to reconnect with U.K.-based AstraZeneca in the coming months, some say the U.S. drugmaker should consider more biotech-focused targets. That strategy has paid off for Merck & Co. and Bristol-Myers Squibb Co.

Although Pfizer has promising products in the pipeline, including the breast cancer drug palbociclib and vaccines against meningitis and staphylococcus aureus, it needs significantly more drugs to generate significant sales growth, said Ori Hershkovitz, an analyst at Tel Aviv-based Sphera Fund who holds Pfizer shares.

“Pfizer is in a very desperate situation, seeing most of its pipeline failing and facing multiple patent expirations,” he said. “It needs growth; it needs to buy a pipeline.”

Pfizer on May 26 officially abandoned its six-month pursuit of AstraZeneca after its final offer of $118 billion (£69.5 billion) was rejected. Investors still see a case for the deal, which would allow Pfizer to enjoy lower corporate tax rates as a UK-based company and a promising conduit for new cancer treatments.

Under UK takeover laws, AstraZeneca could approach Pfizer in August, and Pfizer could re-offer its services to the smaller rival in November.

“I definitely think Pfizer will come back for Astra with a slightly higher offer,” Hershkovitz said. But he recommended Pfizer consider smaller targets that could expand existing research priorities, such as Belgium’s UCB SA and Switzerland’s Actelion Ltd.

UCB, which makes drugs for epilepsy, rheumatoid arthritis and Parkinson’s disease, has annual sales of $5 billion and a market value of $17 billion. Actelion sells lucrative drugs for rare and often life-threatening diseases that command high prices. It has annual sales of $2 billion and a market capitalization of $15 billion.

Leerink Swann analyst Jason Gerberry said it might make sense for Pfizer to buy Dublin-based generics maker Actavis, which recently bought U.S. specialty drugmaker Forest Laboratories for $25 billion.

Pfizer’s disappointment is reflected in its share price, which is down 1.4 percent this year, compared with an 11 percent rise in the ARCA Pharmaceutical Index <.DRG> large U.S. and European drugmakers. The stock has risen 27 percent over the past two years, compared with a 44 percent increase for the pharmaceuticals sector.

A new wave of patent expirations is coming for Pfizer’s top drugs. Its painkiller Celebrex faces a generic in the United States later this year, while its impotence drug Viagra becomes a generic in 2017. The company’s largest product, Lyrica for nerve pain, loses patent protection in the United States by 2018. The three drugs have combined annual sales of nearly $9 billion and account for almost 20 percent of Pfizer’s total revenue.

Biotechs with drugs already on the market that also have exciting technologies should be on Pfizer’s wish list, said Navid Malik, an analyst at London-based Cenkos Securities. He mentioned Celgene Inc. and Vertex Pharmaceuticals Inc.

Roger Pomerantz, who headed business development at Merck from 2010 until last summer, said the potential of Merck’s immuno-oncology drugs — drugs that train the immune system to recognize cancer cells — wasn’t recognized even within the company itself for several years after it acquired them.

“What matters is who is inside and helps understand the science,” he said.

(Reporting by Ransdell Pierson; Editing by Michele Gershberg and Lisa Shumaker)