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Pfizer, AstraZeneca Are Ripe for Pharma Deal: Real M&A

By Tara Lachapelle and Drew Armstrong
April 22, 2014 4:40 PM EDT 1 Comments
AstraZeneca spent the last couple of years trying to restock its own pipeline as patents expire on some of its best-selling medicines, such as Crestor for cholesterol and Nexium for heartburn.
Photographer: JB Reed/Bloomberg
AstraZeneca spent the last couple of years trying to restock its own pipeline as patents expire on some of its best-selling medicines, such as Crestor for cholesterol and Nexium for heartburn.

Large deals make sense for Pfizer Inc. (PFE) and AstraZeneca Plc (AZN), even if not with each other.

While the talks between Pfizer, the world’s biggest drugmaker, and $87 billion AstraZeneca have fizzled, an analyst at Citigroup Inc. expects Pfizer to approach the company again, or AstraZeneca could opt to merge with another peer such as Amgen Inc. (AMGN) as a defense tactic. Pfizer’s backup plan could be to acquire Dublin-based Shire Plc, Albert Fried & Co. said.

Both companies face stalling growth over the next few years, with Pfizer needing new products to replace drugs that lost patent protection and AstraZeneca’s promising cancer treatments still years from hitting the market. At the same time, smaller rivals are scooping up assets and building their presence as drug takeovers surged to a five-year high, led by Actavis Plc’s $21 billion bid for Forest Laboratories Inc., according to data compiled by Bloomberg.

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“Everybody’s scrambling for these assets,” Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried in New York, said in a phone interview. “When you have these large transactions back to back to back, it just begs the question of what do the big pharma guys think about this? Right now, Pfizer’s probably coming to the conclusion that it needs to have a ‘buy’ mentality.”

Informal Talks

New York-based Pfizer held informal, now-discontinued talks with AstraZeneca about possibly buying the London-based company, two people familiar with the matter told Bloomberg News this week, asking not to be identified. One said the talks happened several months ago and there are no plans to resume.

Even so, AstraZeneca’s American depositary receipts jumped 8.8 percent yesterday to a 26-year high and Pfizer advanced 2 percent. While AstraZeneca’s ADRs gave back some gains today, the company’s London-listed shares climbed 4.7 percent to 3,960 pence.

Joan Campion, a spokeswoman for Pfizer, and Michele Meixell, a spokeswoman for AstraZeneca, said the companies don’t comment on market speculation, when asked about the deal talks.

Pfizer’s sales are projected to climb at a compound annual rate of 0.5 percent over the next five years, lagging behind the median rate of 2.4 percent for its closest peers, estimates compiled by Bloomberg show. An acquisition of AstraZeneca would add early-stage drugs in a field of cancer treatments that use the body’s own immune cells to recognize and attack cancer.

“This deal could make a lot of sense for Pfizer,” Alex Arfaei, a New York-based analyst at BMO, wrote in a report yesterday. “First, it would significantly improve Pfizer’s pipeline, particularly in immuno-oncology. Second, obviously there would be significant operating synergies.”

‘Mojo’ Back

AstraZeneca spent the last couple of years trying to restock its own pipeline as patents expire on some of its best-selling medicines, such as Crestor for cholesterol and Nexium for heartburn. The ADRs have risen 35 percent in the past 12 months, triple their gain in the prior 12-month period.

“Presumably, AstraZeneca’s gotten its mojo back,” Shah said. “That’s why it’s in play now.”

That said, AstraZeneca’s own growth won’t return until 2018, so it wouldn’t necessarily be an ideal fix for Pfizer, Tim Anderson, a New York-based analyst at Sanford C. Bernstein & Co., wrote in a report dated April 21.

AstraZeneca Options

AstraZeneca may seek a merger of equals as a defense strategy against Pfizer or other potential suitors, according to Andrew Baum, a London-based analyst at Citigroup, noting that Amgen, with a market value of $89 billion, and AbbVie Inc. (ABBV), at $79 billion, both have cancer programs.

David Caouette, a spokesman for Thousand Oaks, California-based Amgen, declined to comment on whether the company has been approached by AstraZeneca or is for sale. A representative for North Chicago, Illinois-based AbbVie didn’t respond to requests for comment.

Bristol-Myers Squibb Co. (BMY) would be a more ideal fit for Pfizer in any case, said John Boris, an analyst at Atlanta-based SunTrust Banks Inc.

Bristol-Myers, whose market value at $83 billion is in the same range as AstraZeneca’s, “has first-mover advantage” in cancer immunotherapies, Boris said in a phone interview. “We’d argue that Bristol-Myers would make much better sense to deploy $100 billion.”

Overseas Cash

Pfizer also could look at Shire (SHP), a long-speculated takeover candidate that has tax advantages because it’s based in Ireland, Shah of Albert Fried said. Valued at 17 billion pounds ($29 billion) last week, Shire is less than half the size of AstraZeneca.

Laura Hortas, a spokeswoman for Bristol-Myers, declined to comment, while representatives at Shire didn’t respond to a request for comment.

Pfizer is motivated to do a deal outside the U.S. because it has about $70 billion of cash overseas subject to repatriation taxes, according to Boris of SunTrust Banks. At about 28 percent, Pfizer’s tax rate is the highest among its peers, he said. Drugmakers have been using mergers to re-domicile in more attractive tax jurisdictions such as Ireland.

News of the discussions between Pfizer and AstraZeneca come as corporate takeovers in the pharmaceutical industry rose to more than $91 billion in the 12 months ended April 1, according to data compiled by Bloomberg. That’s more than three times the volume in the same period last year, the data show.

The largest of those deals was Actavis’s agreement in February to buy Forest Labs for about $21 billion. AstraZeneca considered making an offer for Forest Labs, said two people familiar with the matter. The company walked away without making an offer, the people said.

Big Deals

The last time this much money was spent on drug deals was in 2009, when Pfizer bought Wyeth in a transaction valued at $64 billion and Merck & Co. acquired Schering-Plough Corp. for about $51 billion, including net debt.

More tie-ups are imminent. Valeant Pharmaceuticals International Inc. (VRX) today announced an offer to buy Botox wrinkle treatment maker Allergan Inc. (AGN) in a cash-and-stock deal valued at about $46 billion. Pershing Square Capital Management LP, the fund run by Bill Ackman and Allergan’s largest shareholder, supports the purchase. Also today, Novartis AG, GlaxoSmithKline Plc and Eli Lilly & Co. unveiled a series of deals for a total of as much as $28.5 billion.

Valeant Chief Executive Officer Mike Pearson has said that his goal is for the company to snag a spot among the world’s five biggest drugmakers by the end of 2016, meaning the serial acquirer needs to increase its market value to more than $150 billion.

“You’ve got Valeant out there saying, ‘We’re coming after you guys,’” Shah said. Now, should Pfizer and AstraZeneca join in on the dealmaking, “that’s going to wake everybody up in the industry.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Drew Armstrong in New York at darmstrong17@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net; Reg Gale at rgale5@bloomberg.net Whitney Kisling, Thomas Mulier

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