AstraZeneca Bid Trades Pfizer Less-Is-More Strategy for Growth

Apr 29, 2014 6:12 am ET

April 29 (Bloomberg) -- For three years, Pfizer Inc. Chief Executive Officer Ian Read has been firing people, trimming research initiatives and shedding businesses in a less-is-more strategy designed to cut back the excesses from a decade of megamergers. No more.

Yesterday’s announcement that Pfizer is seeking to buy AstraZeneca Plc in a new $100 billion megamerger is putting the industry on notice that a company that was once the world’s biggest drugmaker is seeking to quickly reclaim its title. A consummated deal would generate more than $75 billion in combined yearly revenue, based on current sales. It may also offer new growth opportunities and tax advantages for Pfizer, and reopen a door on a promising family of cancer medications.

There are “palatable aspects” to the deal, said Timothy Anderson, an analyst with Sanford C. Bernstein & Co., in a note to clients. Yet “doing yet another big merger can certainly be viewed as a potential failure of sorts.”

Pfizer’s offer, quickly rebuffed by AstraZeneca as too low, was revealed after a pair of experimental drugs thought to have billion-dollar potential for Pfizer, Eliquis and Xeljanz, fizzled in their starts and a third, the breast cancer treatment palbociclib will soon face a potent competitor in Eli Lilly & Co.’s experimental drug bemaciclib.

The most immediate gain for New York-based Pfizer in reclaiming the world’s biggest drugmaker title it lost this year to the Swiss drugmaker Novartis AG would come from AstraZeneca’s top-selling primary care drugs.

Huge Deals

The company has experience with acquisitions this size. From 1999 to 2009, Pfizer completed three deals worth a total of $216 billion, buying Warner Lambert Co., Pharmacia Corp. and Wyeth.

From London-based AstraZeneca, it would get Crestor for cholesterol, with $5.62 billion in sales last year; the asthma treatment Symbicort, with $3.48 billion, and Nexium for heart burn, with $3.88 billion, products that would by slotted into Pfizer’s established products unit. That business already generate the biggest slice of Pfizer revenue, with large parts of its sales overseas.

There is uncertainty over the short term. Read is gambling the U.S. won’t stand in the way of what would be one of the biggest companies ever to leave for a lower tax rate. The U.K. will have a 20 percent corporate tax next year, compared with 35 percent in the U.S.

Tax Conflict

The CEO said yesterday he hasn’t spoken to the U.S. government about a deal, which would put Pfizer’s headquarters in the U.K. with offices in the U.S. “I don’t see why there is any conflict in what we’re doing with U.S. policy,” Read said.

The biggest gain may come over the longterm.

AstraZeneca has a promising research and development roster that includes a new generation of cancer therapies that work by beefing up the body’s immune system. Those medicines, if successful, hold the promise of creating a new $35 billion market, according to Andrew Baum, an analyst at Citigroup Inc. in London.

The AstraZeneca medicines would give Pfizer a second chance to cash in on that market.

Six years ago, Pfizer halted a large trial on tremelimumab, a drug within that family, and later licensed many of the rights to AstraZeneca. Now, doctors say Pfizer may have given up too soon on the treatment. Bristol-Myers Squibb Co. pressed ahead with a similar immune therapy drug, Yervoy, and in March 2011 it was approved in the U.S. as the first drug proven to extend the lives of patients with advanced melanoma.

Immune Therapy

“Every company is realizing that that immune therapy is going to be part of armamentarium of almost every cancer,” said Roy Herbst, chief of medical oncology at the Yale Cancer Center. An AstraZeneca deal would bring Pfizer “all the immune therapy they don’t have. They definitely need to partner.”

In particular, AstraZeneca is testing a drug called called MEDI4736 that tries to trigger the immune system to attack lung tumors and other cancer types by stopping the flicking of an off-switch for immune system cells.

While Merck & Co. and Bristol-Myers so far are thought to be ahead in this type of immune-boosting drug against cancer, “Pfizer and AstraZeneca coming together would bring them pretty much up to the top of this whole field,” Herbst said.

AstraZeneca, which is expected to present early test results of MEDI4736 at a meeting of oncologists in May and June, recently announced it was going to begin final-stage testing of the drug in lung cancer patients with inoperable disease that hasn’t spread far beyond the lung.

The trial, while risky, may be a way “to lap” other companies that have focused mostly on the most advanced lung cancer patients, said Herbst.

--With assistance from Shannon Pettypiece in New York and Oliver Staley in London.