Say what? Pfizer's $101B buyout pitch to AstraZeneca sparks a megadebate

Pfizer CEO Ian Read

Pfizer ($PFE) has reportedly made overtures offering to buy the struggling pharma giant AstraZeneca ($AZN) for $101 billion, setting the stage for what could be the first megamatchup in pharma land in years.

The respected Sunday Times cited a variety of sources saying that "informal conversations" were held in recent months but that AstraZeneca had rebuffed the offer, with no discussions currently underway. The bid would have provided AstraZeneca--with a market cap of about $80 billion--with a hefty premium.

"We don't comment on market speculation or rumors," noted a spokesperson for Pfizer in an email to FierceBiotech Sunday.

But everyone else is. The news immediately triggered a burst of fresh debates in the industry about the relative merits and pitfalls of a megamerger in pharma. Big buyouts changed the landscape of the industry in the late '90s, but also forged the conventional wisdom that huge tie-ups disrupt R&D and fail to produce the kind of major stockholder value that's always promised by management. The consultants at McKinsey, though, have rejected that assessment, laying out the reasons why big acquisitions can be a good idea. And they focused on Pfizer's lineup of three big mergers, for Warner-Lambert, Pharmacia and then Wyeth, to make their point.

AstraZeneca--which saw its shares rise more than 6% Monday morning on the buyout buzz--has come under intense pressure in recent years. CEO David Brennan was shown the door two years ago after leaving the company with the weakest pipeline in Big Pharma. New CEO Pascal Soriot has been wheeling and dealing his way through the industry, snapping up experimental drugs as well as approved therapies, but sales have been slipping as Nexium loses market share to generics and there's no real sense of when the new executive crew can turn this one around.

AstraZeneca CEO Pascal Soriot

That weakness prompted Soriot to dramatically announce plans to move its headquarters and much of the company's R&D operations to Cambridge, U.K., with plans to shutter existing facilities in the latest of several reorganizations that have shed thousands of jobs. The pharma giant's MedImmune subsidiary, meanwhile, has attracted growing attention for its early-stage immuno-oncology programs, though they are well behind the leaders in the field: Merck ($MRK), Bristol-Myers Squibb ($BMY) and Roche ($RHHBY).  

While AstraZeneca has been on a deal spree, Pfizer faced its moment of truth four years ago after a lengthy drought in R&D provoked a crisis at the company soon after its acquisition of Wyeth. Pfizer carved billions of dollars out of its annual R&D budget, dramatically downsizing operations in Sandwich, U.K. and Connecticut as it narrowed its research focus.

But despite a flurry of new approvals, Pfizer has been confronted with its failure to capture significant new revenue following the market launches. And its current pipeline has few late-stage stars in it, aside from the cancer drug palbociclib.

Pfizer has substantial overseas assets, parking more than $40 billion in foreign accounts in order to avoid the U.S. tax man, which may help explain its interest in the U.K. company. The offshore cash makes a buyout of the U.K. pharma company more appealing for Pfizer, noted ISI's Mark Schoenebaum in a note out Sunday evening. Also, factoring in some sizable synergies--lopping off unnecessary operations in the wake of a buyout--would make a $101 billion deal "highly accretive to non-GAAP EPS" for Pfizer. And there are potentially some big added bonuses for Pfizer in AstraZeneca's oncology pipeline, particularly in immuno-oncology.

"Notably, PFE appears to be nowhere in the important field of immuno-oncology (I/O), which BMY, Roche, MRK, and AZN currently dominate," writes Schoenebaum. "Buying BMY could put PFE in the lead in I/O, but it could not use ex-US cash. And PFE could not realistically buy either MRK or Roche. This leaves only AZN if PFE wants a seat at the leader's table."

Bewrnstein's Tim Anderson, though, doesn't think the talks make any sense, especially after Pfizer's Ian Read got investors excited about the notion of downsizing and splitting up the company.

"Many investors and industry observers alike feel that Pfizer is in its currently difficult position precisely because of prior mega-mergers," Anderson noted. "Nearly every big drug company that has undergone large mergers now laments how disruptive transactions like these are to important business functions such as R&D. Pfizer has said the same." 

But Read has said many things about megamergers, giving him plenty of wiggle room on that score. And Citi's Andrew Baum doesn't believe this saga is over yet.

"We anticipate Pfizer to push aggressively ahead with a second approach," Baum wrote in a research note, according to a follow-up report in Reuters highlighting all the reasons why a deal may yet be done. 

- here's the report from The Sunday Times 
here's the Reuters story

Special Reports: Pharma's top 10 M&A deals of 2013 | 2013's top 10 experimental cancer drugs - Palbociclib

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