Pfizer confirms interest in AstraZeneca merger

Pfizer confirmed Monday that it is "considering its options" regarding a possible merger with AstraZeneca having contacted the company twice about such a proposal, most recently on April 26. Pfizer noted that in response to the latest approach, the UK drugmaker "declined to engage" in renewed talks having taken part in "limited high-level discussions," which ended on January 14, following the US company's initial contact in November last year

According to Pfizer, its first proposal made on January 5 included a combination of cash and shares, which represented 46.61 pounds ($76.62) per AstraZeneca share and a premium of approximately 30 percent to the UK company's closing share price on January 3, valuing the transaction at around 58.8 billion pounds ($99 billion). Pfizer added that it is considering a similar offer in which AstraZeneca shareholders would receive "a significant premium" for their shares, via a combination of cash and shares. Pfizer said it "is confident a combination is capable of being consummated," which would lead to the formation of a new UK-incorporated holding company. Sources recently suggested that Pfizer would pay more than 60 billion pounds ($101 billion) to buy AstraZeneca.

In response to Pfizer's announcement, AstraZeneca said Monday that the initial proposal, which was made up of 30 percent cash and 70 percent of Pfizer shares, "very significantly undervalued" the company "and its prospects." The UK drugmaker added that it also raised concerns regarding "the execution risks associated with the proposed inversion structure, as Pfizer would redomicile to the UK for tax purposes." AstraZeneca noted that on January 12 it rejected the proposal, and was informed a few days later that Pfizer was no longer actively considering making an offer. The UK company added that its board "remains confident in the ongoing execution of [its] strategy as an independent company."

Pfizer CEO Ian Read said "we tried to get a mutual announcement to say we were in preliminary discussions," but the executive noted that "AstraZeneca rebuffed that, which is why we were forced to make the announcement." A person close to the matter suggested that Pfizer may be trying to accelerate talks with AstraZeneca in part because the UK drugmaker is scheduled to present promising data at the annual meeting of the American Society of Clinical Oncology, which begins next month.

"Clearly the reason Pfizer has gone public is to try force a deal," commented Deutsche Bank analyst Mark Clark, adding "the price that AstraZeneca is willing to talk about is nowhere near 46 [pounds] or they wouldn’t have been summarily dismissed." Julian Chillingworth of Rathbone Brothers noted that "the price that Pfizer will have to pay is considerably higher than the current one. That price would have to begin with a 50 and not a 40." Citi analyst Andrew Baum said he believed there was now a 90 percent chance that Pfizer would acquire AstraZeneca for at least around 49 pounds ($82.54) per share.

Read commented that a combination of the two companies would create the world's largest drugmaker, bolstering Pfizer's portfolio of medicines for cancer, diabetes and cardiovascular disease, and its presence in emerging markets. "We believe patients all over the globe would benefit from our shared commitment to R&D," Read said, adding "the combination...could further enhance the ability to create value for shareholders of both companies." Read noted that such a transaction "aligns with Pfizer's current structure" and "would complement our two innovative businesses and our global established pharmaceutical business, allowing us to maintain the flexibility for the potential future separation of our businesses." For related analysis, read ViewPoints: Pfizer insists any AstraZeneca acquisition would not trigger U-turn on split aspirations, but can it convince onlookers this deal is not about tax rate? and ViewPoints: AstraZeneca speculation casts shadow over Pfizer's master plan.

Pfizer noted that a merger with AstraZeneca "would create a highly complementary mapping of products, pipeline and operating assets...providing additional critical mass to all business segments." The US drugmaker highlighted the companies' potential portfolio of molecularly targeted medicines for lung cancer, including agents for ALK, EGFR and KRas subtypes, as well as a greater presence in breast cancer and immuno-oncology through drugs targeting PD-L1, CTLA4 and 41BB. In addition, Pfizer said the combined company would benefit from "a strong complementary portfolio of important cardiovascular medicines," such as Brilinta (ticagrelor) and Eliquis (apixaban), along with "a broad...commercial offering of non-insulin anti-diabetic medicines."

According to Pfizer, a transaction would be accretive to its earnings per share in the first full year, while synergies would be achieved through the combination of the two companies’ operations, enabling a more efficient tax structure. Pfizer added that the proposed structure would not subject AstraZeneca's non-US profits to US tax. Under UK takeover rules, Pfizer has until May 26 to announce a firm intention to make an offer for AstraZeneca.

Read remarked "we're satisfied that these large deals can be done and create value," adding "we've had really extensive experience in this and we don’t see this as a distraction." The executive noted that Pfizer would seek to domicile the new company in the UK for tax purposes, although management would be in both the US and the UK, with the head office remaining in New York. Read noted that the company has conducted "initial, preliminary discussions" with the UK government on the deal and will look to talk to the US government today.

Commenting on the proposed deal, Kepler Chevreux analyst Fabian Wenner remarked that while AstraZeneca's pipeline of experimental cancer drugs is attractive, "I struggle to find a rationale for Pfizer other than repatriating its cash accruals abroad." The analyst said "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." Ori Hershkovitz of Sphera Funds Management commented that "the size of the deal testifies to the depth of the crisis Pfizer’s in. They are trying to buy what they think is feasible, not necessarily what is most strategic."

For additional analysis on the potential merger, see ViewPoints: Pfizer insists any AstraZeneca acquisition would not trigger U-turn on split aspirations, but can it convince onlookers this deal is not about tax rate?

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