Pfizer has done it before, but an AstraZeneca bid would be a big surprise

Was Pfizer’s approach to AstraZeneca pushed to the press to ratchet up the pressure on the underperforming company’s board, or was it a red herring to throw off the scent of another huge deal brewing in the sector? Whatever the motivations – and the claims remained unconfirmed today – the reasons for contemplating such a deal remain equally opaque.

The biggest argument against would logically be the US pharma giant’s ongoing preparations to split itself into three units, although some obliging sellside analysts have already calculated that getting even bigger before the split could work out. The move would also run against much of what Ian Read, Pfizer’s chief executive, has been saying for the past few years, but then the people running Pfizer have previously ruled out megamergers only to strike one shortly afterwards.

Investors seem willing to bet on the rumours holding truth – AstraZeneca shares jumped 7% in London today, valuing the company at £51.1bn ($86bn).

The Sunday Times claimed that the Pfizer approach, made some time ago, was worth £60bn ($101bn), but that it failed to turn into serious talks. Pfizer, worth $197bn and estimated to have sufficient firepower to strike such a deal, climbed 2% yesterday.

This reaction shows just how receptive the market remains to M&A, and even to reports of transactions that do not on the surface contain much merit. Official word from either group has yet to emerge.

Breaking up

After a decade of megamerger-fuelled growth Pfizer last year decided to slim down, unveiling plans to carve the business into three units that might, at some point in the future, be physically separated. The strategy was explicitly designed to release value for shareholders and could easily be read as an anti-megamerger manifesto. It would seem to be completely at odds with a bid for AstraZeneca.

Not necessarily so, according to various equity analysts. Astra’s core therapy areas – oncology, respiratory/immunology and cardio-metabolic – would make a good fit, wrote UBS. They and others also pointed out that it would give Pfizer a presence in the hugely promising immuno-oncology space, in particular regaining the anti-CTLA4 antibody tremelimumab that it had myopically licensed to Astra several years ago.

And then there is the possibility of tax savings – analysts at Leerink calculated that Astra was one of the few companies into which Pfizer could “invert”, allowing it to lower its 27% tax rate to 22%. Significant cost savings would also be on the table, boosting earnings and helping to weather the patent cliffs that Astra is approaching.

Ultimately, news of the approach might mean that Pfizer has concluded that its break-up plans will not release as much value as hoped, Bernstein analysts suggested, and that it might feel the need to get bigger first.

Thinking big

This last point does sound believable, as it never looked like the separation of Pfizer would release all that much value. Earlier this year EP Vantage collated a consensus view of what the three divisions might be worth and concluded that, for investors to really benefit from the exercise, a bid with a sizeable premium would need to emerge for at least one of them (Pfizer’s big split will require a big bid to release real value, January 30, 2014).

Combining and then breaking up both the Pfizer and AstraZeneca businesses would be a considerably bigger job than Ian Read had previously outlined. But the deal between Novartis and GlaxoSmithKline that emerged today – a complex and radically transformative transaction – illustrates how big pharma is no longer concerned with simply adding scale.

So a move on Astra would somehow have to fit into Pfizer’s break-up plans to make sense. And even then it would represent a long and risky bet.

Of course there is still a good chance that nothing will come of this rumour – putting the perennial big pharma bid target together with the industry’s most enthusiastic consolidator was always going to get a bite. But one thing is certain: buying AstraZeneca is certainly not the radical transformation that Pfizer investors had in mind for the coming years.

To contact the writer of this story email Amy Brown in London at [email protected] or follow @AmyEPVantage on Twitter

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