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Ignoring harsh lessons, Pfizer pursues $100B deal to buy struggling AstraZeneca

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So much for conventional wisdom in pharma. Years after most of the Big Pharma chiefs swore off megamergers after pondering the corporate carnage wrought by the huge buyouts of the last decade, Pfizer ($PFE) is headed down that path one more time. The pharma giant confirmed on Monday that it made an offer to buy AstraZeneca ($AZN) last January for about $100 billion and followed up with renewed interest just days ago. And it's prepared to cut billions in costs following a successful tie-up--a message that is likely to strike fear in the hearts of investigators working in both R&D organizations.

Pfizer CEO Ian Read

Pfizer CEO Ian Read spelled it all out in a lengthy statement. He's looking to combine both companies into a single operation spanning the globe, with the company based in the U.K. for tax purposes, executives in both the U.K. and the U.S. with a head office in New York. Back in January, Pfizer offered $76.62 in cash and shares for the company, which the board turned down. And it's still prepared to offer a "significant premium" over AstraZeneca's share price on April 17.

Combining the two companies, Read added, would create a single entity with a much larger cancer drug pipeline, a large commercial cardiovascular portfolio with a PCSK9 program now in Phase III, a significant operation in the diabetes market and a chance to grow faster in emerging markets.

AstraZeneca has three areas in R&D where it is quite complementary to Pfizer: oncology, cardiovascular disease and inflammation, R&D chief Mikael Dolsten told analysts today. Combining their pipelines would "provide more value for patients," where the scientists could pick the winners to proceed with and build value for the company.

The actual experience with Pfizer's Wyeth buyout--which led to massive R&D cuts following weak productivity--would seem to fly in the face of that statement. There would be plenty of opportunities to cut out costs if Pfizer buys AstraZeneca. Pfizer spent $6.7 billion for R&D last year to AstraZeneca's $4.8 billion, a combined $11.5 billion chart-topper that would be ripe for the cutting board. 

AstraZeneca, though, won't go easily. The company quickly fired back today, noting that CEO Pascal Soriot and the board had rebuffed a recent overture from Pfizer that they put out a joint release announcing upcoming talks and spelling out the reasons for continuing to resist Pfizer's embrace.

None of the twisting and turning, though, can stop Pfizer from committing substantial resources--including a large cache of overseas cash--to the acquisition.

"We believe that a transaction would further strengthen our ability to generate strong and consistent cash flow, targeted for both investment in our business and return to shareholders, while at the same time offering an efficient operating structure and the anticipated realization of attractive synergies," said Pfizer.

"We have great respect for AstraZeneca and its proud heritage as an innovation-driven biopharmaceutical business with a rich science-based foundation in both the United Kingdom and Sweden," Read said in his statement. "In addition, the United Kingdom has created attractive incentives for companies to manufacture products and maintain and protect intellectual property, and we have seen that capital and jobs have followed these types of incentives."

"Such a deal is likely to be highly accretive (potentially double digit percentage increases) to PFE's non-GAAP EPS," wrote ISI's Mark Schoenebaum in a quick note to investors Sunday night. "However, despite the likely high level of accretion, it's not at all clear that PFE shareholders will broadly applaud a merger with AZN. The bull/bear argument will likely center around the perceived strength (or lack thereof) of AZN's pipeline, as both camps will likely agree that AZN's base business is likely to erode massively over the next ~6+ years."

Pfizer has a long history of major buyouts, and its track record was bad enough to scare off other CEOs over the past few years. The Wyeth buyout provided a textbook example of what can go wrong when two big biopharma companies merge. While Genentech was successfully absorbed by Roche ($RHHBY), which essentially ceded leadership in R&D to its California subsidiary, Pfizer was forced to hack out billions of dollars from its annual research budget after winding up with a bloated and inefficient pipeline following a series of big acquisitions. The general consensus among analysts, with the notable exception of McKinsey, has been that megamergers disrupt R&D, introduce a lengthy period of paralyzing uncertainty and generally fail to produce the kind of big new products that are needed to justify the costs.

At one point, that seemed to be Read's position.

"Management has generally seemed to express regret over the company's large size and difficulty growing--driven in part by its 3 prior big acquisitions--and it has previously acknowledged how disruptive mergers are to critical business functions like R&D," noted Bernstein's Tim Anderson in an investors note today.

Today, though, in a call with analysts Read touted Pfizer's experience at successful mergers as a reason for moving ahead on AstraZeneca. And its top execs followed up saying that its record of chopping $4 billion in costs following the Wyeth acquisition showed they could do an M&A deal like this in a way that benefits shareholders.

A big buyout now would also fly in the face of one of the biggest trends in pharma, with the emphasis now on core capabilities and a narrower focus on areas of expertise.

Downsizing has become the order of the day at Pfizer, which has been dividing the remaining company into a few big units in preparation for what some senior analysts are hoping is a formal breakup of assets. R&D, meanwhile, has been touting the prospects of its cancer drug palbociclib, which may make a run at an accelerated approval, without generating much interest in the rest of its late-stage assets. And while the pharma giant scored several notable approvals in 2012, the new drugs have underperformed on the market.

AstraZeneca, meanwhile, is in the middle of the latest in a series of major reorganizations. Just days ago the company signaled its interest in spinning off its anti-infectives and neurosciences businesses in order to further narrow its focus--a big theme in the industry as a whole. The company is facing brutal generic competition for its top franchises, with analysts uncertain just when the U.K.'s number two pharma giant will hit rock bottom on revenue. A new diabetes franchise, meanwhile, has struggled to make its mark. AstraZeneca has been wheeling and dealing for new drugs for several years now, but only recently began to attract favorable attention for its immuno-oncology program, which is being rushed into Phase III as Bristol-Myers ($BMY), Merck ($MRK) and Roche lead a growing pack of companies looking to make their mark in the field.

Even the prospect of a takeover by Pfizer would likely cause consternation at AstraZeneca R&D, which is still facing being uprooted from Alderley and moved to new facilities to be built in Cambridge, U.K.--a transformational moment that would be imperiled by a megamerger. New doubts and uncertainties at this stage, with R&D still in flux and thousands of jobs being cut, could hardly be expected to inspire their best work.

- here's the release from Pfizer
- here's the release from AstraZeneca

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