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Pfizer and AstraZeneca: merger of majors cancelled or just postponed?
Pfizer is currently the world’s largest research-based pharmaceutical company, with 2013 revenues (excluding consumer health) of $47.9 billion. Recently, it made a bid for the UK’s AstraZeneca (2013 revenues of $25.7 billion) equivalent to £50 ($78) per share. This valued the company at more than £63 billion ($98 billion). A lot of money, you might think, but AstraZeneca lost no time in rejecting the offer. The same thing happened back in January this year, when the American company valued AstraZeneca at around £59 billion. Its CEO commented of the latest offer: ““Pfizer’s proposal would dramatically dilute AstraZeneca shareholders’ exposure to our unique pipeline and would create risks around its delivery”.
Why is Pfizer so keen on this merger? A company statement said the deal would bring together two “highly complementary innovative and established pharmaceutical businesses, enhancing the combined company’s ability to meet patients’ needs”. It went on to describe “enhanced pipeline development opportunities, premier global operations and the anticipated realisation of operational and financial synergies” as rationales.
In particular, it’s likely that AstraZeneca’s oncology pipeline is an attraction. The company currently has nine anti-cancer formulations based on PARP- and MEK inhibitors that entered Phase III clinical trials towards the end of 2013 or early 2014, and which are expected to be registered between 2016 and 2018. Pipeline management is vital for a drug company, as even the most successful drugs are patent-protected only for a limited time. Seven Pfizer drugs that generated sales of $2,769 million in 2011 recently lost exclusivity in key markets, and in 2013 the impact of generic competition was enough to reduce their sales to $778 million. The global pharma market is lucrative, with 2013 revenues of more than $800 billion. But bringing a continuous stream of effective new drugs onto the market is vital if research-based companies are to maintain their share of it.
Cost savings are another reason for the merger, and one that has gained attention from politicians. The concern is that jobs might be lost in an economic sector where the UK is a global leader. It’s a measure of how seriously Pfizer takes this issue that its CEO wrote to Prime Minister David Cameron, with an assurance that a planned research centre in the university city of Cambridge and a manufacturing site in Macclesfield would still be completed, also that the merged entity would have its European business headquarters in the UK.
This may go some way to addressing the concerns of those such as Lord Heseltine. A veteran Tory politician, who held cabinet office in the Margaret Thatcher administration, he commented “There are so many issues about the science base, about the supply chains, about employment prospects that ought to be explored”. And from the opposition Labour party, business spokesperson Chuka Umunna asked “Do we really want a jewel in the crown of British industry, our second biggest pharmaceutical firm, to basically be seen as an instrument of tax planning?”
So, what’s the next step for the rejected Pfizer? A hostile takeover is a possibility, as is a further increase in the offer price. But should the merger go through, in the wake of GE’s recent deal with Alstom in France (and not so long after Mondelez acquired confectionery maker Cadbury), the political fall-out may be as significant as the commercial benefits.
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