Shareholders in AstraZeneca are no doubt pleasantly surprised by the uplift in the share price following the offers from Pfizer. The share price has doubled in the last year on improving prospects with an even sharper increase in the last few weeks as soon as a bid was rumoured. That puts the company on a historic p/e of about 20 at the time of writing.
AstraZeneca has of course been a dog for some years with falling revenue and earnings, a poor new product pipeline and existing products going off patent. Or as Neil Collins said in the Financial Times yesterday “six months ago, hardly a single analyst had anything positive say about AstraZeneca”. The only good thing about the company was the dividend yield and the dividend had been maintained despite declining cover. Whenever I looked at the stock, there always seemed to be more attractive pharmaceutical companies out there with real growth prospects.
Now it’s all change, with the management puffing up the improved product pipeline and saying the £50 per share offer from Pfizer is inadequate, substantially undervalues AstraZeneca and is not a basis on which to engage with Pfizer. They also don’t like the large proportion of the consideration payable in Pfizer shares and the tax-driven inversion structure (the deal is apparently tax driven and is of value to Pfizer because they can avoid some taxes). The Chairman said in the company’s announcement that: ” We are showing strong momentum as an independent company, in particular with our exciting, rapidly progressing pipeline, which the Board believes will deliver significant value for shareholders. Pfizer’s proposal would dramatically dilute AstraZeneca shareholders’ exposure to our unique pipeline and would create risks around its delivery. As such, the Board has no hesitation in rejecting the Proposal.”
So the decision for shareholders seems to be relatively simple. Do you believe that the product pipeline is really going to turn round this company? Or is a bird in the hand worth two in the bush? Note that on the former point, analysts are forecasting flat growth in earnings for the years ending December 2014 and 2015, and declining revenue, so one must look further ahead.
If there is a hostile bid by Pfizer, shareholders need to look very carefully at the defence document to see how certain any growth in 2016 and beyond really is. In the uncertain world of drug development, they would need to give a very convincing story.
Some politicians (Michael Heseltine is one) have complained about the possible loss of a “national champion”, and the risk that Pfizer might undertake an asset stripping exercise. Some seem to have forgotten that AstraZeneca was put together from a merger of two companies – Astra, a “national champion” in Sweden and UK based Zeneca which was spun out previously from ICI. The Swedes no doubt objected to the merger on the same grounds at the time and the combined company is still listed on the Nordic OMX exchange in addition to the LSE.
AstraZeneca had of course been following the “big pharma” business strategy for many years. But many observers of that market think it’s a broken model. Spending very large sums to develop new products, with high risks and short patent lives is no longer working as it gets harder and harder to find, develop and launch new products. Indeed smaller companies seem to do it a lot more cost effectively. But AstraZeneca had already refocused to use it extensive international sales and marketing network and experience of getting regulatory approvals to foster smaller drug development companies. Perhaps AstraZeneca was overdue a bout of “restructuring”, but some may argue this was already in progress under the new management at the company. It does not necessarily though seem a valid reason to reject an attractive financial offer from Pfizer.
However much individual investors would like to preserve a national champion, in the cold, hard world of modern stock markets, where UK listed companies generally have a very large proportion of overseas based institutional investors, any attractive financial offer is unlikely to be rejected.
The Prime Minister seems reluctant to oppose the deal based on the reassurances about keeping R&D and manufacturing in the UK, however difficult it might subsequently be to make those commitments stick – history tells us they are impossible to enforce because there is always a “force majeure” get out clause. But there may be obstacles from competition authorities to such a large deal.
In summary my conclusion is that AstraZeneca will have some difficulty fighting off a bid. It seems unlikely some “white knight” will appear to counter-bid because there are few possible such bidders and most won’t see the tax benefits that Pfizer will obtain. If the bid does not happen then will the re-rating of the shares persist? Shareholders need to consider carefully whether they are happy to continue holding despite the risk of a significant share price fall back.
One point to note for indirect shareholders is that it is proposed that there will be only a NYSE listing. This would force many private shareholders to sell their prospective Pfizer shares as many brokers do not support foreign holdings so you would be forced to sell, potentially realising a capital gain.
Note that for more background on the company you may find it helpful to read a report on the recent Annual General Meeting of the company by Mark Bentley which is available here.
Roger Lawson
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