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Pfizer loses bid for AstraZeneca
June 2014
by Jeffrey Bouley  |  Email the author
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NEW YORK & LONDON—Try as it might to sweeten the pot on an unsolicited acquisition offer to U.K.-based AstraZeneca, U.S.-based Pfizer was not able to move the company to enter into negotiations, and just a little over a week after its May 18 announcement of a final proposal of around $117 billion and AstraZeneca’s subsequent rejection, Pfizer announced that it was abandoning its acquisition plans.
 
Had it succeeded, however, it would have been the largest foreign takeover of a British company and the biggest M&A deal ever for Pfizer.
 
“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,” said Ian Read, chairman and CEO of Pfizer. “As we said from the start, the pursuit of this transaction was a potential enhancement to our existing strategy. 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.”
 
In total, Pfizer made three different offers to AstraZeneca. At one point it hinted at a possible hostile takeover, with Pfizer’s chief financial officer, Frank D'Amelio, saying, “any option you can think of would be an option,” when asked if his company might go straight to AstraZeneca shareholders, a comment followed by, “what we really need is to have AstraZeneca engage with us [to] be able to do the right kind of analytics that need to get done.” However, Pfizer later officially backed off on the idea of going hostile.
 
In passing on the final Pfizer offer, AstraZeneca’s chairman, Leif Johansson, said: “We have rejected Pfizer's final proposal because it is inadequate and would present significant risks for shareholders, while also having serious consequences for the company, our employees and the life-sciences sector in the U.K., Sweden and the U.S. Pfizer's approach throughout its pursuit of AstraZeneca appears to have been fundamentally driven by the corporate financial benefits to its shareholders of cost savings and tax minimization.”
 
The process started in late April, but AstraZeneca would never enter into negotiations. The initial offer was sweetened to about $106 billion, which was promptly rejected on May 12 with an official statement that began, “Pfizer’s announcement contains no new proposal nor substantive new information” and continued with the sentiment that AstraZeneca’s board believed Pfizer was making an opportunistic attempt “to acquire a transformed AstraZeneca, without reflecting the value of its exciting pipeline. This value should accrue fully to AstraZeneca shareholders … The board reiterates its confidence in AstraZeneca’s ability to deliver on its prospects as an independent, science-led business.”
 
Leerink Research seems more or less in agreement with AstraZeneca’s future looking bright, writing recently that the company’s “recent series of data releases highlights what we continue to believe is one of the best mid- to late-stage pipelines within all of biopharma.”
 
Although many in the United Kingdom were as wary of the unsolicited acquisition attempt as their Big Pharma jewel in the crown was, a fair number of market-watchers were excited about the prospect of such a deal, though in some cases more for the possibility that such a huge acquisition might, as Reuters said in one article, restore Pfizer’s “fading competitive edge.”
 
Joshua Owide, GlobalData’s director of healthcare industry dynamics, described the potential deal as being unlike any other in Pfizer’s corporate evolution to date, as the majority of value involved in the merger attempt would come from Pfizer’s ability to nurture ongoing research and development activities at AstraZeneca.
 
GlobalData believed that a Pfizer/AstraZeneca megamerger “could create an R&D juggernaut, with aggregate expenditure of over $11 billion, surpassing current R&D spending leaders Novartis and Roche” and creating a pipeline with overall projected sales of $10.8 billion in 2019.
 
“The proposed purchase of AstraZeneca appears to be a very complementary fit with Pfizer, especially given the latter’s plans to spin off some of the mature components of its prescription pharmaceutical business,” Owide said at the time. “AstraZeneca’s expiring drugs would meld into Pfizer’s Established Products division, and the former’s promising pipeline would bolster the other two Pfizer business units, which focus on new medications and consumer health, making them prime candidates for divestment.”
 
In outlining its own position on May 13, Pfizer cited a “compelling strategic rationale” for the potential merger, noting, “Clinical, regulatory and reimbursement risks continue to increase the cost of drug development and the risk profile of the industry. Pfizer believes a combination of Pfizer and AstraZeneca would create an industry leader with the scale, operational efficiency, financial strength and breadth of portfolio to better address these challenges.”
 
Pfizer also maintained that combining the companies “would enhance the innovative and established portfolios of both businesses” and provide an “even more desirable product portfolio to enhance commercial position in key emerging markets and enhanced optionality to pursue future separation, though no decisions have been made.”
 
As Ali Al-Bazergan, an analyst at Datamonitor Healthcare, noted in the midst of the acquisition back-and-forth: “There are numerous motivations behind Pfizer courting—primarily, it would add AstraZeneca’s much-coveted early-stage drugs in immuno-oncology—with many provided breakthrough status and development pushed into Phase 3. It also allows Pfizer to explore an outlet for repatriating its cash-pile overseas, tap into potential tax, capital and operational synergies and lastly grooms an infrastructure to extract even more value in potential streamlining divestments.”
 
However, the U.K. government was very much split on the value of such a deal and what it might take away from the United Kingdom in terms of scientific advancement and statute in the pharmaceutical marketplace.
 
Attempting to allay those concerns and win both the government and the pharma over to its side, Pfizer had submitted on May 12 assurances to two parliamentary committees that set out commitments to research and development. Pfizer pledged to complete AstraZeneca’s research and development hub in Cambridge, as well as ensure that one-fifth of the company’s total R&D workforce would be based in the United Kingdom and promise to retain substantial manufacturing facilities in the country.
 
“To ensure our commitments are binding, we included them with our proposed offer announcement understanding fully that they would be binding as a matter of English law,” Pfizer said. However, it would have been legally binding only for five years, and some past Pfizer actions put its assurances in a bleak light for AstraZeneca and others.
 
For example, Pfizer cut back research at a U.K.-based site in 2011, and Sweden’s finance minister, Anders Borg, actually warned members of the British parliament to be wary, saying that Pfizer went back on employment and R&D promises after it acquired Swedish company Pharmacia. Since that takeover in 2002, the number of employees there has dropped by 90 percent.
 
Another stumbling block was that many noted that such a big acquisition flew in the face of Pfizer’s stated intentions to streamline, and Pfizer has made no secret that it might break up in the near future to make that happen.
 
Moreover, speculation was high that Pfizer was looking less at AstraZeneca’s pipeline prospects than it was a better corporate tax position in the United Kingdom. As Deutsche Bank analyst Mark Clark wrote in an investor’s note in early May, the proposed acquisition “doesn’t work financially on most people’s calculations without the tax benefit … Without a doubt, tax is a major motivation.”
 
Clark’s calculations indicated that under the current offer to acquire AstraZeneca, if Pfizer could swap its 26-percent U.S.-based tax rate for a lower U.K. rate and subsequently cut $3 billion in costs from the combined company, it could have seen earnings per share rise 14 percent three years after closing the deal, compared to a rise of just 3 percent if it didn’t get the better tax rate.
 
Although he had downplayed it somewhat, Pfizer CEO Ian Read never denied the tax implications. In a call with analysts May 5, he insisted there was a “fit on the portfolio” but admitted it wasn’t a “pipeline story per se,” and, in reference to the three ideas of pipeline boosting, cost cutting and tax savings, he said, “You know, I’ve been asked, would you do it if you didn’t have this part or you didn’t have that part? I think the answer is I’m doing it because I have all three parts.”
 
Code: E061401

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