June 24, 2018
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AstraZeneca is tougher Pfizer target as possible bid looms

By Oliver Staley, David Welch and Manuel Baigorri, Bloomberg

LONDON — Pfizer isn’t giving up on striking an overseas takeover to cut its tax rate and gain a new pipeline of drugs, even as the potential cost of acquiring AstraZeneca rises.

Pfizer abandoned a 69.5-billion-pound ($116 billion) effort to buy London-based AstraZeneca on May 26, and under British takeover rules it can make the first steps toward a renewed bid next week, on Aug. 26. While it weighs that approach, Pfizer also is looking at other possible targets, including Actavis Plc, said people familiar with the matter.

Executives at Pfizer prefer to strike a deal with AstraZeneca, and the U.S. company isn’t likely to make a move on an alternative target anytime soon, said the people, who asked not to be identified discussing private information. AstraZeneca’s board rejected Pfizer’s offers as too low.

AstraZeneca’s confidence in its pipeline of experimental drugs may embolden the board to seek an even higher price, said Odile Rundquist of Helvea in Geneva. Since May, the company agreed to spend as much as $2.1 billion to expand in respiratory treatments, raised its sales forecast and reported successful trial results on three cancer medicines that may become blockbusters.

“Astra will ask for much more, and they have proven they are building a very solid pipeline,” said Rundquist, who has a hold rating on London-based AstraZeneca’s shares.

British rules require would-be acquirers who walk away from a bid to wait six months in most cases before making a renewed approach. For Pfizer, that waiting period ends Nov. 26.

But after three months, the target can invite the bidder to re-enter talks — an unlikely scenario in this case given AstraZeneca’s earlier rejections. The bidder can also make its own approach with a single knockout offer it feels sure the target would be able to recommend to shareholders.

AstraZeneca in May told Pfizer that the company would need to offer at least 58.85 pounds a share, while Pfizer’s final proposal was 55 pounds. AstraZeneca’s drugs may still be too experimental for Pfizer to increase its bid, Rundquist said.

“My impression is that the deal will never go through, because it is too expensive for Pfizer,” she said.

AstraZeneca declined to comment on Pfizer’s interest, citing the British takeover panel’s rules. David Belian, a spokesman for Actavis, didn’t immediately return a call and e-mail message seeking comment.

Pfizer has split into three internal units, two focused on developing new drugs, and another of off-patent or older medicines. It’s looking for a deal to beef up those businesses as a prelude to possibly breaking up the company.

Pfizer Chief Executive Officer Ian Read has said he’s also looking for a deal that will yield cost reductions and a way to lower Pfizer’s tax rate and access overseas cash.

“We will continue to evaluate all opportunities, regardless of size, through the lens of value creation for our shareholders and enhancing the competitiveness of our business,” Joan Campion, a spokeswoman for New York-based Pfizer, said in an e-mail.

Actavis, which on July 1 closed a $28 billion takeover of Forest Laboratories Inc., now has a $59 billion market value that makes it large enough for Pfizer to change its tax domicile to Dublin through an acquisition, the people said. The company, which is run from Parsippany, New Jersey, obtained its Irish domicile by buying Warner Chilcott Plc last year.

AstraZeneca stock has fallen 1 percent since Pfizer walked away May 26. Pfizer stock has slipped 2 percent since May 26.

Other companies that are large enough to serve as Pfizer targets under U.S. tax rules include London-based GlaxoSmithKline and Laval, Quebec-based Valeant Pharmaceuticals International.

Neither is an ideal target though: A bid for Glaxo would face even fiercer political opposition in Britain than Pfizer’s AstraZeneca bid, and Valeant is tangled in a hostile attempt to buy Allergan. Pfizer is also sensitive to mounting political opposition to the so-called tax inversions, one person said, which may have the company approach any new deals cautiously.

An overseas tax domicile would give Pfizer a way to bring its more than $30 billion in offshore cash and investments back to the U.S. without being taxed. Read could also make acquisitions and use the lower tax rate to instantly improve the profits of any U.S.-based company that he buys.

Pfizer has about $48.8 billion in cash, equivalents and short and long-term investments, at least 70 percent of which is located overseas, the company has said.

AstraZeneca, Britain’s second-biggest drug maker, now has 15 drugs in late-stage trials or under regulatory review, almost double the number from a year ago.

Among the most significant are MEDI4736, which uses the body’s own immune system to fight tumors, and AZD9291, a lung cancer treatment. The company also reported progress in drugs that treat diabetes, respiratory disease and gout.

After Pfizer’s initial cash-and-stock offer became public in April, AstraZeneca CEO Pascal Soriot’s defense was to promise investors their shares will eventually be worth more than what Pfizer offered, without the risks of the disruption caused by a merger or regulators blocking the deal.

In May, AstraZeneca said it expects revenues of $45 billion by 2023, a 75 percent increase over 2013. The company cautioned that before its pipeline of drugs reaches the market, revenues would fall below 2013 levels until 2017 as it loses patent protection for its most lucrative products.

On July 31, however, AstraZeneca revised its 2014 revenue forecast to say they will now remain at 2013 levels, or around $25.7 billion. The day before, AstraZeneca announced it was buying Barcelona-based Almirall SA’s lung medicines for $875 million, and could pay another $1.22 billion if the drugs meet development and sales goals.

The news “gives them more ammunition to continue to fend off Pfizer,” said Jeffrey Loo, an analyst at Standard & Poor’s.

Still, the tax benefits — Pfizer would shift its headquarters to Britain for the purposes of taxation — means Pfizer is likely to re-bid and can afford another 3 or 4 pounds a share, said Vamil Divan, an analyst at Credit Suisse in New York.

“Ultimately, the long-term benefits outweigh that added cost,” he said. “Unless they have other ideas which can match what Astra has,” Pfizer will have to at least carefully reconsider a bid for AstraZeneca.


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