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Pfizer Still Wants AstraZeneca After Bid Rejected

By Drew Armstrong and Oliver Staley
April 28, 2014 4:19 PM EDT 25 Comments
An employee fills a tray with cell compound solution at Neusentis Ltd.'s research laboratory, a unit of Pfizer Inc., in Cambridge, U.K.,
Photographer: Chris Ratcliffe/Bloomberg
An employee fills a tray with cell compound solution at Neusentis Ltd.'s research laboratory, a unit of Pfizer Inc., in Cambridge, U.K.,

Pfizer Inc. (PFE) is back in the megamerger game.

The U.S. drugmaker proposed buying AstraZeneca Plc (AZN) for about 58.8 billion pounds ($98.7 billion) in what would rank as the industry’s biggest-ever takeover, surpassing Pfizer’s $64 billion purchase of Wyeth in 2009. AstraZeneca spurned the offer as too low, and Pfizer said it’s considering its options.

If AstraZeneca eventually agrees, a deal would create a company incorporated in the U.K. for tax purposes and run from New York. London-based AstraZeneca’s operations would be sewn into Pfizer’s three new business units.

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Pfizer offered 46.61 pounds a share in cash and stock for AstraZeneca in January, and AstraZeneca declined to pursue negotiations, Pfizer said in a statement today. The proposal is about 14 percent above the April 25 close for AstraZeneca. The stock today climbed above that price, gaining the most in more than two decades.

For now, Pfizer is still trying to draw AstraZeneca into talks.

“We tried to get a mutual announcement to say we were in preliminary discussions,” Pfizer Chief Executive Officer Ian Read said on a conference call today. “AstraZeneca rebuffed that, which is why we were forced to make the announcement.”

If Pfizer is able to consummate the deal, it would be among the biggest ever U.S. company to leave the country’s border. Read said that while he hadn’t discussed that with the U.S. government, he was confident it could get done.

‘Significantly Undervalued’

Pfizer wants to reach an agreement that AstraZeneca’s board can endorse and is considering its options.

“Clearly the reason Pfizer has gone public is to try to force a deal,” said Mark Clark, an analyst at Deutsche Bank in London. “The price that AstraZeneca is willing to talk about is nowhere near 46 or they wouldn’t have been summarily dismissed.”

Pfizer’s January proposal “very significantly undervalued” AstraZeneca, the U.K. company said in a statement. AstraZeneca also was concerned that Pfizer wanted to pay 70 percent of the price in shares, AstraZeneca said. The company concluded that, absent a specific and attractive proposal, it was not appropriate to engage in discussions with Pfizer.’’

“They’re sellers, we’re buyers,” Read said. “Of course they’re going to say it’s undervalued.”

Overseas Cash

Another key component of the deal is moving Pfizer outside the U.S. for tax purposes. A deal would allow Pfizer to use some $70 billion of cash it has built up overseas that would be subject to taxes if brought back to the U.S. and, because the combined company would be incorporated in the U.K., would lead to a lower tax rate.

“I don’t see why there’s any conflict in what we’re doing with U.S. policy,” he said on the conference call. The company would keep its operational headquarters in the U.S., and maintain a U.S. stock listing.

The Pfizer CEO has complained before about the U.S. corporate tax rate -- the highest in the world. “We saw how difficult it was to do business development with an uncompetitive tax rate,” he said on the conference call.

Read contacted AstraZeneca Chairman Leif Johansson on April 26 for the first time since January, with no specific proposal, AstraZeneca said today.

The last few months after the initial approach convinced Read it was time to try again. “We saw strength in our pipeline as results came through, that made us feel we’re coming from a position of greater strength and confidence, and we saw news come through their pipeline,” he said.

U.K. Rules

Pfizer has until May 26 to make an offer for AstraZeneca, or say that it won’t bid, under U.K. takeover rules.

Pfizer may be trying to accelerate talks with AstraZeneca in part because the U.K. drugmaker is scheduled to present promising data at the annual meeting of the American Society of Clinical Oncology, which begins May 30 in Chicago, according to one person familiar with the situation who asked not be named as the matter is confidential.

AstraZeneca rose 14 percent to 46.67 pounds in London, the biggest one-day advance since at least 1993. Pfizer climbed 4.2 percent to $32.04 in New York. The average premium for pharmaceutical takeovers of at least $1 billion was 30 percent over the past five years, data compiled by Bloomberg show.

‘Considerably Higher’

“The price that Pfizer will have to pay is considerably higher than the current one,” said Julian Chillingworth, chief investment officer for Rathbone Brothers Plc, a London-based investment firm that owns AstraZeneca shares and has 22 billion pounds under management. “That price would have to begin with a 50 and not a 40.”

An acquisition of AstraZeneca would add to the $127 billion of mergers among pharmaceutical companies this year, according to data compiled by Bloomberg. An industrywide recalibration that has been building since 2011 reached a peak last week with a flurry of activity by GlaxoSmithKline Plc (GSK), Novartis AG and Valeant Pharmaceuticals International Inc. (VRX)

Under Pfizer’s proposal, the two companies would be combined into a U.K.-based holding company, with headquarters in New York, Pfizer said. The deal would give the company flexibility to proceed with a potential split-up, as Pfizer has been considering, Pfizer said.

“We’ve had really extensive experience in this and we don’t see this as a distraction,” Read told reporters on a conference call. “We’re satisfied that these large deals can be done and create value. This is something society is requesting of the pharmaceutical industry. They want products faster and they want better value.”

Pfizer would seek to domicile the new company in the U.K. for tax purposes in order to shield AstraZeneca from the higher U.S. corporate tax rate, Read said. AstraZeneca’s business, which is structured for a 21 percent to 22 percent tax rate, couldn’t survive if it was taxed at 38 percent, he said.

Government Talks

Pfizer has had some “initial, preliminary discussions” with the U.K. government on the deal and will seek to talk to the U.S. government today, Read said on the call. The combined company would inject about $100 billion into the U.K. economy, he said. The purchase would be the largest ever of a U.K. company.

Any Pfizer bid would be judged by “independent procedures and frameworks,” Jean-Christophe Gray, a spokesman for Prime Minister David Cameron, told reporters in London today. “When it comes to individual company takeovers, there are rules and procedures that are well established. I’m sure it wouldn’t be right for me to comment further on this.”

Bank of America Corp. is advising Pfizer, while AstraZeneca listed Evercore Partners Inc., Goldman Sachs Group Inc. and Morgan Stanley as advisers in its statement today.

Read said he wouldn’t commit to maintaining manufacturing jobs in the U.K., although said “we do see the U.K. as an attractive place to do science and to do manufacturing.”

Largest Company

Combining the two would create the largest health-care company by revenue, based on trailing 12-month financials, a position it may cede as the U.K. company loses $2.5 billion of sales by 2017, Sam Fazeli, senior analyst for pharmaceuticals at Bloomberg Industries wrote last week.

A deal with AstraZeneca would help Pfizer add early-stage drugs in a field of cancer treatments that use the body’s own immune cells to recognize and attack tumors. AstraZeneca in January announced an agreement with Immunocore Ltd. to develop new treatments that use immune cells, and it also has several of its own immune-based drugs being tested in multiple cancers.

Many of the largest drugmakers face a wave of patent expirations that are cutting billions of dollars from their top lines, forcing them to look for new therapies.

Pfizer has reorganized its business over the past three years, shuttering some research projects and emphasizing others. Sales are projected to climb at a compound annual rate of 0.5 percent over the next five years, trailing the median rate of 2.4 percent for its closest peers, estimates compiled by Bloomberg show.

Pfizer ‘Crisis’

“The size of the deal testifies to the depth of the crisis Pfizer’s in,” said Ori Hershkovitz, a managing partner at Sphera Funds Management Ltd. in Tel Aviv, which owns Pfizer shares. “They are trying to buy what they think is feasible, not necessarily what is most strategic.”

Pfizer’s interest has surprised some analysts and investors, given that AstraZeneca faces the loss of patent protection on some of its best-selling drugs. AstraZeneca has forecast that sales in 2017 will be similar to last year, as patents expire on the heartburn pill Nexium and Crestor for cholesterol.

While AstraZeneca’s pipeline of experimental cancer medicines is attractive, the company wouldn’t add value for Pfizer, said Fabian Wenner, an analyst at Kepler Cheuvreux in Zurich.

“I struggle to find a rationale for Pfizer other than repatriating its cash accruals abroad,” he said. “Doing that, using its cash accruals, they could easily do something else. AstraZeneca is the worst target of all of them. Unless Pfizer thinks they are the experts on dealing with patent cliffs, I can’t see why they would want to buy them.”

Cancer Focus

Pascal Soriot, AstraZeneca’s CEO, joined the company in October 2012 from Roche Holding AG, where he was head of pharmaceuticals at the world’s biggest maker of cancer drugs. His focus on oncology therapies and biological treatments has helped restore investors’ confidence in the company’s prospects, said Odile Rundquist, an analyst with Helvea SA in Geneva.

“The success rate of oncology drugs are definitely higher,” Rundquist said in an interview today. Profit margins are higher as well on cancer drugs, she said.

Valeant this month offered to buy Allergan Inc., maker of the Botox wrinkle treatment, in a cash-and-stock deal valued at about $45.7 billion. Novartis also agreed to buy London-based GlaxoSmithKline’s cancer drugs for as much as $16 billion while selling most of its vaccines division to Glaxo for $7.1 billion and its animal-health unit to Eli Lilly & Co. for $5.4 billion.

To contact the reporters on this story: Phil Serafino in Paris at pserafino@bloomberg.net; Oliver Staley in London at ostaley@bloomberg.net; Drew Armstrong in New York at darmstrong17@bloomberg.net

To contact the editors responsible for this story: Phil Serafino at pserafino@bloomberg.net Albertina Torsoli, Marthe Fourcade

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