A higher price could get a deal done between Pfizer ($PFE) and AstraZeneca ($AZN) if British regulators play along, but investors aren't convinced that would be a particularly good outcome for either company. The two pharmas aren't far apart on price, and any renewal of negotiations could come as early as August.
When AstraZeneca rejected Pfizer's "final" bid at the end of May it said it would accept a per-share price of £59; Pfizer's last offer was £55 per share in cash and stock. The dueling pair are now bound by British regulations; these would allow AstraZeneca to resume talks with Pfizer in August. But if Pfizer wants to make a new bid, it would have to wait until November, according to a Wall Street analyst cited by The New York Times. That's unless another bidder gets into the mix--and then all bets are off.
Investors we talked to have various notions about whether or not the deal will happen, but they are united in their lack of enthusiasm for the combination.
Hedge fund manager Harald Schwarz from German healthcare investment advisor Medical Strategy sees the relentless pressure for new products as intensifying and making the deal a necessity. "The value of branded drugs exposed to generic competition in the U.S. will reach a new peak in 2016 with nearly $30 billion--it's even higher than in the year of the patent cliff 2012--and so Big Pharma can't rely on R&D alone, but must restructure, merge, break-up and refocus," he said "So, I'm sure the AstraZeneca-Pfizer deal will be done."
Medical Strategy is an investor in AstraZeneca. And there's some expectation that pressure from AstraZeneca investors will make the deal happen eventually. Schwarz sees the immuno-oncology pipeline at AstraZeneca, particularly its anti-PD-L1 monoclonal antibody MEDI4736, as well as potential tax savings as driving Pfizer's interest in the deal.
Once a deal gets done, Schwarz expects Pfizer would continue in its earlier break-up strategy by splitting into "established" and "innovative" companies--along the same lines as Abbott's ($ABT) split from AbbVie ($ABBV) in 2012.
"Pfizer's size is its enemy, and getting smaller should unlock substantial value," he added. But, ultimately, Schwarz doesn't see any of this wheeling-and-dealing as good for the industry. "It's all financial engineering, and the idea of the Pfizer-AstraZeneca merger only supports my ongoing thesis for the weakness of Big Pharma. Despite some new drugs in pipelines, we haven't seen a real proof for increased R&D efficiency."
Portfolio manager Oliver Marti at Columbus Circle Investors doesn't expect another offer from Pfizer. But he thinks if AstraZeneca did engage Pfizer and the offer was 10% higher than the last one, the deal would get done.
He sees good synergy between the pair because of "overlap in cardiology and oncology" and a more favorable tax rate as the positives of either deal. He thinks AstraZeneca's valuation hinges entirely on the success of its oncology pipeline--which took a bit of a hit earlier this week when its cancer candidate olaparib failed to secure accelerated approval from FDA.
Marti said that if AstraZeneca's oncology pipeline fails to pan out, the decision to remain independent will have been the wrong one.
A third healthcare investor, Les Funtleyder, a consulting partner with U.K. investment advisor BlueCloud Healthcare and a former healthcare portfolio manager with Miller Tabak, sees an AstraZeneca purchase as the wrong path entirely for Pfizer. He notes a grim history for Pfizer with large M&A, with the exception of the 2000 acquisition of Warner-Lambert for $90 billion, in which it gained lipid-lowering blockbuster Lipitor. (The "final" cash and stock bid from Pfizer for AstraZeneca translated into a value of about $117 billion.)
He also suspects that the British government would not let the deal go through, even if both companies were on the same page. "I'm not sure it will happen at any price unless there are some assurances about job loss to the British government and, to some degree, the Swedish government," he said. AstraZeneca employs about 51,500 people globally, and 35% of them, or about 18,000 people, are in Europe.
Funtleyder would prefer to see Pfizer try a different approach, perhaps a series of smaller bolt-on acquisitions along the lines of the recent Merck ($MRK) purchase of hepatitis C play Idenix ($IDIX) for $3.9 billion. He thinks we could see pharma start to look more like portfolio managers, capital allocators who buy and sell assets. But he noted, with some chagrin, that it's not always easy being a portfolio manager.
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