The two firms first started meeting about a potential deal in January this year but AstraZeneca rejected a ‘final’ offer of £55 per share from Pfizer in May. The approach, which valued the firm at £69.4bn, was criticised by UK investors, politicians and scientists.
However Pfizer can return to make a renewed bid for AstraZeneca on 26 November, when the six-month ‘lock-out’ period expires. Given the impact a deal would have on the UK economy and patients across the globe as well as AstraZeneca shareholders, speculation is rife over the chances of this taking place.
AstraZeneca is one of the commonly held stocks by UK managers. More than 50 of the 90 funds in the IMA UK Equity Income sector have the company as a top 10 holding, as do over 110 of the 271 IMA UK All Companies members.
Big names with major positions in the firm include FE Alpha Manager Adrian Frost and Adrian Gosden's £6.9bn Artemis Income, Mark Barnett's £12.4bn Invesco Perpetual High Income and Philip Matthews' £1.5bn Schroder UK Alpha Plus funds.
Performance of stock vs index over 10yrs
Source: FE Analytics
FE Alpha Manager Woodford (pictured), who launched the £3.3bn CF Woodford Equity Income fund in June, suspects there’s a "50/50 likelihood" that Pfizer will return with another offer for the British firm. AstraZeneca is the top holding in his portfolio and at the time of the original offer, the manager was one of those convinced the deal should not go through.
He says some factors have changed that make another offer less likely, such as renewed political opposition to ‘tax inversion’ deals. These deals see firms pick up overseas companies as a way to lower their domestic tax obligations.
Increased opposition to tax inversion deals has already halted Abbvie’s proposed acquisition of Shire, while a number of commentators have argued that Pfizer’s interest in buying the UK firm could have eased after the shift in sentiment from politicians. However, Woodford says this might not be enough to put the firm off.
“The original approach from Pfizer was not just about tax inversion. The proposed transaction also held considerable commercial logic – Pfizer doesn’t really have a pipeline of new drugs but AstraZeneca does. Buying AstraZeneca and its pipeline would therefore solve a major problem for Pfizer, particularly if they can buy it on the cheap,” he explained.
“At the time of the initial approach from Pfizer, we strongly believed that an independent AstraZeneca would achieve far better returns for its shareholders than the offer from Pfizer could have delivered. That remains the case, although six months on, our confidence in this belief is even stronger and the progress being made by the company is tangible.”
The reason for Woodford’s confidence in the long-term prospects of the British pharmaceutical firm is the same factor that makes it so attractive to Pfizer - its drug pipeline.
In a strategy update this morning, AstraZeneca chief executive Pascal Soriot said the firm’s late-stage pipeline has been “transformed well ahead of plan” following increased research & developed productivity and accelerated programmes.
The group has 14 potential new medicines in the Phase III or registration stages of development, between 14 and 16 that have potential for regulatory submissions and eight to 10 approvals ready for 2015 and 2016.
Woodford said: “Once viewed as the company’s major weakness, we expect AstraZeneca’s pipeline to deliver considerable long-term future growth. The value of a pipeline is impossibly difficult to model with precision and this represents a key analytical failing as far as the pharmaceutical sector is concerned. Judgement is required here – not mathematics – and our judgement on the long-term value that lies in AstraZeneca’s pipeline remains overwhelmingly positive.”
“We are impressed with the renewed vigour and clarity in AstraZeneca’s scientific research and believe that its core franchises of respiratory, cardiovascular and diabetes, plus its presence in sectors of growing importance such as immuno-oncology, should all contribute to very promising future long-term growth.”
Oncology is a new growth platform for the company, which it expects to contribute largest proportion of pipeline-driven revenue growth in 2015/16 and has the potential to grow to quarter of sales by 2023. Its immuno-oncology portfolio has 13 combination trials underway and another 16 planned.
The manager says the market’s scepticism over AstraZeneca’s ability to hit its “tough” target of increasing revenues by three quarters over the next decade creates a near-term opportunity for Pfizer to exploit, as it has held back its share price recently, although it has outperformed the FTSE 100.
Performance of stock vs index over 2yrs
Source: FE Analytics
“If Pfizer are to return with a renewed bid, shareholders will again be faced with a choice between the allure of a substantial short-term profit or the promise of a potentially much more valuable long-term future from an independent AstraZeneca,” he said.
“Clearly, the former option can be embraced with much more certainty than the latter and, it is the nature of the modern stock market to focus detrimentally on the short term. However, in this instance, we believe that it would be a mistake to do so, for two reasons.”
The first reason, according to Woodford, is that AstraZeneca’s pipeline has a greater chance of success if it has remains under the control of an independent firm rather than being put in the hands of a potential acquirer. This owes to the poor track record of the pharmaceutical industry when it comes to capitalising on the potential created by M&A deals.
Secondly, Woodford fails to see how Pfizer can pay what he believes to be the long-term value of the AstraZeneca pipeline. Although this would depend on the terms of a renewed offer, the manager points out that the previous bid “fell a long way short” of what he sees as the firm’s true worth.
CF Woodford Equity Income has a clean ongoing charges figure of 0.75 per cent and targets a 4 per cent yield.
