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What Goldman Sachs Thinks About the Pfizer, AstraZeneca Breakup

NEW YORK (TheStreet) - Goldman Sachs is reiterating a view that Pfizer (PFE) CEO Ian Read may consider breaking up the pharmaceuticals giant in the wake of its failed effort to merge with U.K.-drug-maker AstraZeneca (AZN).

Read More: Pfizer Could Remain In Dow After U.K. Move

On Monday, Pfizer said it did not intend to improve upon a $118.8 billion bid for AstraZeneca that was swiftly rejected by the target company's board of directors.

Those comments from Pfizer, signaled the company would not pursue a hostile merger effort by engaging directly with AstraZeneca's shareholders. Nor was Pfizer willing to raise its bid to a price where AstraZeneca's board of directors said it might support a merger.

"We continue to believe that our final proposal was compelling and represented full value for AstraZeneca based on the information that was available to us. As we said from the start," Pfizer CEO Ian Read said in a statement.

"We will continue our focus on the execution of our plans, bringing forth new treatments to meet patients' needs and remaining responsible stewards of our shareholders' capital," Read added.

Without an improved offer or a hostile effort, Pfizer's biggest merger effort in a generation may be on ice. Goldman Sachs analyst Jami Rubin took that development as reason to reiterate her belief Pfizer's CEO Ian Read may breakup the New York-based pharma giant.

Already, Read has been an active seller of Pfizer's non-core operations, allowing the company to refocus on its drug pipeline and research and development efforts. In 2012, Pfizer sold its nutrition business to Nestle for $11.85 billion in cash, one of the company's largest-ever divestitures.

Similar moves may now be on the forefront of Read's mind if Pfizer has truly ended its efforts to buy AstraZeneca.

"While some investors questioned whether Pfizer was trying to get big again, we think CEO Ian Read has been very clear about his strategy since the day he took over as CEO: He will do what it takes to unlock value, be it a break-up, M&A or whatever drives the most value," Goldman's Rubin said in a Tuesday note to clients. "Our long held view has been that Pfizer size is its enemy and that getting smaller through break-ups or merge-spin strategies (acquisition of Wyeth which led to divestitures and spins) could unlock substantial value," the analyst added.

Goldman Sachs rates Pfizer a 'buy' with a $35 a share price target. The firm also notes Pfizer shares underperformed the S&P 500 and the S&P Pharmaceuticals Index since reports of a merger first emerged on April 20th.

A breakup or rededication to Pfizer's core businesses could unlock significant value, Rubin noted, citing value in Pfizer's Established Pharma (GEP) business and its Global Innovative Pharma (GIP) business, in addition to a drug pipeline that is not fully appreciated by investors.

Pfizer could either sell GEP and GIP, effectively breaking the company into three separate firms, or it could look for accretive acquisitions for those businesses ahead of a split at a later date, potentially in 2017.

In the first-quarter of 2014, Pfizer disclosed separate financial reporting for its GIP and GEP businesses, a helpful boost to the underlying value of those businesses.

Pfizer's bid for AstraZeneca wasn't just controversial in the target's board room. The company's plan to invert its corporate structure so it would be headquartered in the U.K. for tax-purposes enraged U.S. politicians. In the U.K., Parliament members feared job losses, R&D cuts and the loss of a national pharmaceutical champion.

Read More: AstraZeneca Falls after Pfizer Retreats from $119 Billion Bid

-- Written by Antoine Gara in New York.

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