Pfizer Pursues AstraZeneca

Despite two rejections, Pfizer is trying to persuade AstraZeneca to enter talks about a merger. And with the clock ticking and events at a standstill, it’s unclear whether Pfizer will switch from persuasion to a hostile takeover.

The companies revealed on April 28 that Pfizer approached U.K.-based AstraZeneca about a combination back in November 2013. At a subsequent meeting in January, Pfizer made a preliminary $100 billion offer of 70% stock and 30% cash, which AstraZeneca quickly rejected. At the time, Pfizer notified AstraZeneca that it was no longer actively considering the offer.

Last week, however, “in light of recent market developments,” Pfizer approached AstraZeneca again to try to restart discussions. But AstraZeneca declined, saying it saw no “specific and attractive proposal” from Pfizer.

Pfizer CEO Ian Read argues that a merger would strengthen the combined company’s “innovative core” as well as its product portfolio, particularly in the areas of oncology, inflammation, and cardiovascular health. The deal also proposes a new U.K.-incorporated holding company with management in both countries, head offices in New York City, and a listing on the New York Stock Exchange.

Read points to recent drug development advances by both companies, the opportunity to build world-scale businesses, and an excellent strategic fit as reasons for his firm’s renewed interest. A recent spate of drug industry deals and speculation about mergers has also caused an uptick in drug company share prices (C&EN, April 28, page 5).

But the tax implications of a potential move of Pfizer’s base from New York City to the U.K. are garnering much of the attention. “It would have been very detrimental to the deal to bring AstraZeneca profits, which are taxed differently from the U.S., into the U.S. tax jurisdiction, which is why we opted for a domicile in the U.K.,” Read explained to the media in a conference call.

It’s not clear how the U.S. government would view such an “inversion,” or switching of potentially all of Pfizer’s tax liability to a lower U.K. rate. Noting that other U.S. companies have similarly moved offshore for tax reasons, ISI Group analyst Mark Schoenebaum wondered, in his firm’s own conference call on the news, whether Pfizer’s move would be “the inversion to end all inversions.”

Read responded to the issue by suggesting that “this transaction will make us a stronger company and give us greater ability to invest. Investment goes to places that have great science and really well-educated work forces, so I don’t believe it should be any concern to the U.S. government that we’re becoming a stronger company and more competitive on a global scale.”

Read also pointed to operational and financial synergies that would benefit a combined company. Schoenebaum suggested that Pfizer, which cut costs significantly when it acquired Wyeth in 2009, might trim at least 35% of expenses at AstraZeneca.

Pfizer contends that a deal with AstraZeneca is consistent with its long-standing strategy to split into three parts—innovative pharmaceuticals; generic drugs; and vaccines, oncology, and consumer health care—by strengthening the businesses that would be split off. However, the timing of any such move, if it happens, might change. Regarding AstraZeneca’s rejection, Pfizer is now “evaluating its options,” according to Read.

Although Pfizer isn’t known for making hostile bids, the fact that it has made its talks with AstraZeneca public might be a sign that it will engage at least in “robust negotiations,” according to ISI merger expert Michael Craig.

“The clock is ticking,” he added, because U.K. takeover law gives Pfizer 28 days to confirm that it either will or will not make an offer. If a deal doesn’t come to pass, Pfizer could potentially be precluded from making another offer for up to six months, Craig pointed out.