Pfizer, Inc. Rebuffed: Is AstraZeneca plc Worth Another Try?

Big-time pharma mergers have had a mixed track record, with large combinations often leading to significant cost reductions (and firings) in sales and administration but at the cost of large disruptions to R&D. Pfizer (NYSE: PFE  ) is apparently not afraid to give it another try, as word came out over the Easter holiday that the company has approached AstraZeneca (NYSE: AZN  ) with a $100 billion-plus bid to acquire this once-struggling pharma giant.

Time will tell if Pfizer can coax AstraZeneca to the negotiating table and seal a deal, but such a combination may not be as big of a risk for Pfizer as it may immediately seem.

The potential deal
Various sources have claimed that Pfizer offered AstraZeneca a deal that valued the company at £60 billion or about $101 billion. Such a price (around $80/share) would represent slightly more than a 25% premium for AstraZeneca and an all-time high valuation for the shares. Not much has been said about the rumored deal structure, but as the prospect of a tax inversion has been raised, it would stand to reason that Pfizer shares would be included (for a tax inversion deal, the non-US target company shareholders have to hold 20% or more of the combined company).

What would Pfizer gain?
Given Pfizer's apparent recent adoption of "smaller and more focused is better," this looks like a strange move at first. Digging deeper, the deal makes more sense.

Pfizer hasn't made the same sort of huge commitment to oncology as Merck (NYSE: MRK  ) or Bristol-Myers (NYSE: BMY  ) , but the company hasn't shied away from making it clear that management views oncology as a key therapeutic focus. AstraZeneca has a strong early stage immuno-oncology program, with a strong pipeline of checkpoint agents.

AstraZeneca hasn't gotten the attention that Merck or Bristol-Myers has for their oncology programs (and that's not entirely unfair, given that there is less data on them), but it would be a strong core from which Pfizer could build a large oncology franchise. Like Bristol-Myers and Merck, AstraZeneca has PD1 and PD-L1 assets, as well as checkpoint costimulators.

AstraZeneca also has a pretty credible immunology program, with assets acquired in the MedImmune transaction finally starting to make a strong showing in the pipeline. Immunology hasn't been a particularly strong area for Pfizer, and combining with AstraZeneca would fill a gap between approved products (Xeljanz, mostly) and an early stage pipeline.

Synergies and lower taxes, too
It's not just AstraZeneca's pipeline that could bring value to Pfizer in a deal. Past large combinations suggest that 10% to 15% cost synergy would be relatively easy to achieve, and that may well prove to be on the low side. Combine that with the possibility of tax inversion, lowering Pfizer's tax rate by shifting its legal domicile to a lower-tax location like Ireland, and Pfizer can largely pay for the deal even without significant pipeline contributions.

AstraZeneca would also add to Pfizer's business in other ways. AstraZeneca has a strong emerging market presence (around 20% of sales), and gaining more exposure to these faster-growing markets won't do Pfizer any harm. A deal also wouldn't preclude Pfizer's previously announced intentions to split into three, as AstraZeneca's key pipeline assets (oncology and immunology) could be split accordingly, and the company would also add mature products and JVs that would fit with the "value" component of the Pfizer split.

The bottom line
If AstraZeneca has indeed rebuffed Pfizer, it may simply be a negotiating tactic to secure a better price. Then again, Pascal Soriot has done a lot in a relatively short period of time to get AstraZeneca on better footing, and he may not be looking to sell out so early in the turnaround plan. If Pfizer really presses the case, AstraZeneca may look to a merger-of-equals to fend off Pfizer, with Amgen, AbbVie, and Biogen Idec all in the right area of size for such a transaction.

Speculating on M&A isn't a particularly good way for most investors to try to generate returns, but a Pfizer/AstraZeneca deal does make more than a little bit of sense. Whether Pfizer does indeed pursue this to a successful merger, it will at least shine a brighter light on AstraZeneca and the value of its rebuilt pipelines in oncology and immunology.

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