AstraZeneca’s share price finishes 22% below Pfizer bid of £55

The disappointment was palpable amongst AstraZeneca’s shareholders this morning with their shares plummeting up to 15% at the open to around £41.50 after the drug company rejected the latest offer by Pfizer for the company. The shares closed the session down 11% to £42.87, some 22% below Pfizer’s bid price.

Astra’s board rejected what was seen as a pretty generous fourth and final offer for the Anglo-Swedish drugs group by American pharmaceutical giant, Pfizer, given the premium over the undisturbed price and the recent history of disappointments at the UK based group. Pre-bid Astra’s shares traded at around £35, well below the final £55 a share offer from Pfizer, with the latest £64.9 billion cash and shares bid priced at 16 times forward EBIDTA (1.747 Pfizer plus £24.76 for each AstraZeneca share). This compared with the previous offer on May 2nd, of 1.845 shares plus £15.98 in cash per AstraZeneca share.

The cash component of the bid was increased in this latest attempt to land the deal.But Pascal Soriot, the Chief Exec. and Leif Johansson, AstraZeneca’s chairman believed that the Pfizer offered represented poor value for shareholders given the apparently bright prospects for the company and were holding out for a figure closer to £58-59 a share to reopen negotiations. Johansson said that Astra was cynical about the offer given the focus was on tax savings for Pfizer saying “appears to have been fundamentally driven by the corporate financial benefits to its shareholders of cost savings and tax minimisation”. Many have been concerned that the US government may act quickly to prevent the combined entity relocating its base to the UK to reduce its corporation tax bills.

Pfizer said the proposal was “final” and that it would not make a hostile bid should this attempt fail to win over the board. Ian Read, chief executive and chairman of Pfizer, said he believed the fourth offer was “compelling” for AstraZeneca shareholders and that a combination of the two companies is “in the best interests of all stakeholders”. AstraZeneca has repeatedly argued that Pfizer has failed to fully value its growing pipeline of drugs, particularly new cancer drugs that are currently in development.

Pascal Soriot warned a takeover by Pfizer could delay the development of crucial drugs and could cost lives, though some remain sceptical of this stance. Astra’s employees might be mighty relieved if the Pfizer approach is rebuffed and clearly the odds are looking increasingly stacked against the American aggressor. However, Soriot has a mountain to climb to deliver anything like the growth the management team has promised for the shares to exceed the £55 bid price, especially given the uncertainties of drug development and risky clinical trials. A 75 % increase in revenues over the next decade looks fanciful unless the company’s strategy is executed flawlessly and they have more than their share of luck in the clinic. With a poor record of successes in clinical trials over the last 5 years and a further looming patent cliff with key drugs like Nexium in 2014 and Crestor in 2016 (both representing 40% of revenues), things aren’t going to be easy.

With Astra’s management rebuffing Pfizer yet again, the only hope for the Americans is for shareholders to pressurise the board to reopen negotiations but this doesn’t look too likely given this morning’s share price performance.

There are plenty of risks of AstraZeneca going it alone. I’m sure many private investors would bite Pfizer’s hand off for £55 given the prevailing share price today. With the risk so high for AstraZeneca to deliver its promises and the difficulties of recent years, it will be fascinating to see where AZ shares are in 5 years time if the Pfizer deal isn’t consummated – who will be right?

Contrarian Investor UK

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