Pfizer’s Medivation Deal May Not Be Enough

In the past year, Pfizer (PFE) has vacillated between bulking itself (acquiring Hospira last year), trying to move overseas (its collapsed $160 billion inversion deal with Allergan (AGN)) and considering breaking itself up. Earlier this month, Pfizer’s CEO suggested that, actually, the company might want to stick together after all.

So it this the right deal for the flailing pharmaceutical firm?

Medivation gives Pfizer a valuable prostate cancer drug, Xtandi, and a relatively quick earnings boost, but it does nothing to lower Pfizer’s taxes—the primary motivation behind all other major deals Pfizer has pursued in recent years except Hospira.

In fact, the Medivation deal might even raise Pfizer’s taxes. Pfizer is paying for California-based Medivation all in cash, some of which will come from inside the U.S. and some of which will come from abroad. But repatriating foreign cash, as Pfizer says it plans to do “in a tax-efficient way,” can still come with an additional bill from Uncle Sam. (The company says the deal won’t affect its tax rate this year, but will offer guidance on the impact for 2017 when it reports its fourth-quarter earnings.) It will also make Pfizer bigger, making it harder to do an inversion down the road.

As for what Pfizer will do next, it’s unclear if the company even knows what it really wants. The company still isn’t sure whether it should split itself up, but it promised again on Monday to decide on that by the end of this year. At the same time, Pfizer CEO Ian Read has declined to rule out going after even bigger acquisition targets that analysts have put forward, including Bristol-Myers Squibb (BMY) and even AstraZeneca (AZNCF), the British drugmaker that Pfizer already tried and failed to acquire in 2014.

“[Business development] is where you implement strategies, it’s not a strategy on its own,” Read acknowledged cryptically during a conference call Monday discussing the Medivation deal. “We’re open to any type of deal that would continue to add value for shareholders.”

As Pfizer has laid the groundwork for a potential split, its acquisitions have been primarily focused on bolstering what it calls its “innovative” side of the business—a portfolio of newer drugs with faster-growing sales than Pfizer’s slow-and-steady “established” unit. With Medivation, though, Pfizer might have reached a point of equilibrium. “As for priorities, I think we’re moving to a more balanced view now,” Read said, responding to an analyst’s question about whether the company might seek further deals on the innovative side. “We’ve put a lot of money into both businesses.”

Certainly, Pfizer was willing to pay up to win the competitive bidding process for Medivation. It was reportedly up against Celgene (CELG) and Sanofi (SNYNF), the latter of which had offered up to $61 per share for the company. Pfizer is paying $81.50 per share of Medivation—or about $20 more than Sanofi’s offer per share. Medivation stock surged nearly 20% on the announcement of the deal.

Still, that might not be enough to satisfy investors. “We continue to believe that [Pfizer] still needs to pursue either a large, transformative acquisition or a string of several additional acquisitions to firm up its Innovation Core before the company can be broken up,” SunTrust analyst John Boris wrote in a research note Monday. “The most important catalyst” for Pfizer’s stock this year, he added, “will be what management decides to do on the M&A front.” Pfizer shares traded down slightly Monday afternoon.

Pfizer is likely still hunting for a deal that would lower its tax rate, and some investors haven’t given up on the possibility that it might again attempt an inversion overseas, despite fierce government and political opposition. Pfizer wouldn’t discuss specific future M&A targets, but if it tries a third time to invert, it will certainly have to fight even harder than it fought for Medivation.