At the heart of Pfizer's pursuit of British drugmaker AstraZeneca is a shortage of attractive products in its own research pipeline, aggravated by a recent series of disappointing drug launches, according to some industry analysts and money managers.
They view the $100-billion gambit for AstraZeneca as a return by Pfizer to the "mega-mergers" of the previous decade that allowed the U.S. company to benefit from huge cost savings and divert shareholder concern over low returns from its research and development.
As recently as last year, Pfizer Chief Executive Ian Read had virtually sworn off major dealmaking, wary of the criticism that huge transactions, such as the $90 billion purchase of Warner-Lambert in 2000, had not improved the company's prospects for innovative products.
"Pfizer is doing this from a position of weakness," said Michael Liss, a portfolio manager at American Century Investments who holds Pfizer shares. "If they had enough in their own pipeline, they wouldn't need to buy a big company; they'd be doing smaller collaborations."
Liss still believes the deal makes sense because it could create $4 billion in annual cost-savings for Pfizer, knock down its tax rate by rebasing the biggest U.S. drugmaker to Britain, and bring Pfizer potentially lucrative cancer drugs from AstraZeneca that work by stimulating the immune system.
"Pfizer's problem is they have a very thin drug pipeline," said John Boris, an analyst with Suntrust Robinson Humphrey. "And this is a very clear admission of that," he said, referring to Pfizer's two rebuffed efforts since January to buy AstraZeneca.
Read appeared to head off the criticism on Monday in discussing his efforts to reignite talks with Astra. He told investors that Pfizer had redoubled its efforts to buy AstraZeneca after favorable data from trials of new and experimental company drugs allowed it to act from "a position of strength."
But industry watchers questioned that description. Pfizer had hoped to turn a corner on its research when it won regulatory approvals over the past three years for kidney cancer treatment Inlyta and Xalkori for lung cancer after a decade without any significant new drugs. But both have seen weak sales.
Two newer treatments that had been deemed potential blockbusters with billions of dollars in sales, Xeljanz for rheumatoid arthritis and Eliquis to prevent blood clots that can cause strokes, have failed to take flight.
Experimental breast cancer drug palbociclib, which has been deemed Pfizer's most exciting product in development, is now expected to face stiff competition from more effective and safer drugs in the same class being developed by rivals, Boris said.
Holes in the pipeline
Pfizer has chased down and swallowed three other major drugmakers in the past 15 years, beginning with its hostile acquisition of Warner Lambert. The deal gave it full ownership of cholesterol fighter Lipitor, which went on to become the world's biggest medicine, and created opportunity for deep cost cuts that propped up earnings for several years.
But Pfizer's profits were on the downswing by 2003, after the company failed to come up with new products to replace aging blockbusters. So Pfizer spent $60 billion that year to acquire Pharmacia Corp, counting on thousands of job cuts and other cost savings to get its earnings growing again.
When Pfizer's laboratories remained unproductive, and the company was faced with impending generic competition for Lipitor, Pfizer paid $68 billion in 2009 for Wyeth.
Morningstar analyst Damien Conover said Pfizer is not facing impending patent expirations on big medicines, with the exception of painkiller Celebrex, so is not desperate for a merger as it was with the Wyeth deal.
But Conover said Pfizer needs cost cuts because it will likely generate average annual earnings growth of only 2 percent over the next five years with its existing products, half the average likely growth for other large drugmakers.
"They have a few potential blockbusters, but not of the magnitude of Merck or Bristol-Myers," Conover said, which have strong immuno-oncology programs. "So the AstraZeneca deal is really about cost cutting, and Pfizer's need to increase growth."
Alex Arfaei, an analyst with BMO Capital Markets, said a merger with AstraZeneca would provide Pfizer big advantages, such as slashing its tax rate to the 20 percent range, from its current rate of about 27 percent.
Many Pfizer investors are holding onto their shares in the hope the company by 2017 will split off two or more of its three main divisions into separate companies, creating more opportunities for share buybacks and higher Pfizer dividends.
One division focuses on vaccines, cancer drugs and consumer products; another on other patent-protected medicines and the third on so-called established products, meaning branded generics mostly targeted for developing countries.
Brian Turner, a healthcare analyst for Levin Capital, which holds over 11 million shares of Pfizer, said Read probably thinks the various parts of Pfizer will be more attractive if they include AstraZeneca's assets.
"He realizes that he ultimately needs to be smaller," Turner said, "but maybe he thinks because of the Astra assets he could maybe build it up and then break everything down."