It is a year this week since Pfizer admitted defeat in its £69.4bn hostile pursuit of AstraZeneca. The factors that led the US company to launch its raid — the need for new drugs and greater efficiency — have since spurred a record wave of deals across the pharmaceuticals sector. But none have been as big as the one thwarted by AstraZeneca’s board last May after a bitter battle that drew in politicians on both sides of the Atlantic and sparked debates over US tax policy and the UK science base.
A year on, the Financial Times revisits the estranged partners in the mega-merger that never was, to find out whether AstraZeneca’s decision to remain independent is paying off for shareholders, and how Pfizer has done without a big acquisition.
When Pascal Soriot took charge of AstraZeneca in 2012 he found himself at the wheel of a vehicle hurtling towards a cliff edge because the group was about to lose patent protection on some of its best-selling drugs.
A takeover by Pfizer would have provided an easy escape route. Instead, the Anglo-Swedish company chose to keep driving — confident there would be a soft landing on the other side of the precipice.
That conviction is about to be tested, because the stomach-churning descent is under way. Revenues are forecast to drop by a mid-single digit percentage this year and keep falling until 2017, when they are likely to be about a third lower than their peak the year before Mr Soriot took over. Nexium, a heartburn treatment, and Crestor, a drug for high cholesterol, accounted for 35 per cent of group revenues last year. By 2017, about two-thirds of these sales are expected to be lost to cheap generic competition.
AstraZeneca’s resistance efforts rely on cancer drug advances
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When Pfizer came calling last year, AstraZeneca told investors that new drugs were arriving to cushion the fall. This optimism has only increased in the subsequent year as data from clinical trials has strengthened the case for several potential blockbusters. Updates are expected on two of the most promising — cancer drugs MEDI4736 and AZD9291 — at the annual conference of the American Society of Clinical Oncology in Chicago this weekend.
The replacement of old, mass-market pills such as Nexium and Crestor with a new generation of more specialist biological treatments has altered industry perceptions of Astra from a laggard to a leader in pharmaceuticals innovation.
Most of the new assets were already in the pipeline when Mr Soriot arrived, but the Frenchman has been widely credited with picking winners and accelerating their development. “He’s completely transformed the culture,” says one former AstraZeneca executive.
However, while the decline of old drugs is a certainty, the promise of the new ones remains unproven. Even the most bullish analysts doubt that AstraZeneca will meet Mr Soriot’s target to deliver $45bn of annual revenues by 2023. This would involve a doubling in sales from the 2017 trough, according to Citigroup estimates.
There was a reminder of the inherent uncertainties in such forecasts on Tuesday when AstraZeneca said it was reviewing options for its brodalumab drug for the skin disease psoriasis after Amgen pulled out of a co-development partnership.
The US company was concerned about data suggesting the medicine might cause suicidal thoughts in patients. This move has thrown into doubt the $600m in annual revenues that Citi expected from the product by 2023.
AstraZeneca
Tough competition, especially in the crowded cancer market, and increasing pressure on pricing from budget-conscious health systems, could also interfere with Mr Soriot’s rosy projections. Meanwhile, critics have accused the company of “financial engineering” to smooth the path to growth.
Seamus Fernandez, an analyst at Leerink, says a recent deal with Celgene involving a $450m upfront payment in return for a half share of future revenues from the use of MEDI4736 against blood cancers suggested a “desperate need” to prop-up near-term revenues.
Mr Soriot strongly rejects such criticism, arguing that partnerships in non-core areas such as haematology will bring drugs to market more quickly by tapping expertise that AstraZeneca lacks. Still, the dispute has highlighted his tricky task of not only clearing the “patent cliff,” but also bridging the gap between the current £43.73 stock price and the £55 per share offer rejected from Pfizer a year ago.
Pfizer
A takeover of AstraZeneca would have solved three of Pfizer’s biggest problems: its 24 per cent corporate tax rate, one of the highest in the industry; an accumulation of roughly $17bn in overseas cash, which would attract a hefty penalty if repatriated to the US; and a patchy pipeline of new drugs.
Fast-forward to today, and the company’s predicament is largely unchanged, but investor sentiment has improved. In the past 12 months, Pfizer’s stock has appreciated 16 per cent, outperforming US rivals Merck and Johnson & Johnson, which are up 5 per cent and 1 per cent respectively.
After the Astra rejection, Ian Read, a plain-speaking Scot and Pfizer lifer who became chief executive in 2010, switched back to his “Plan A”: returning $12bn to shareholders in share buybacks last year, while exploring the merits of breaking up the group.
He is effectively running Pfizer as two companies — one focused on innovative drugs, the other on slower-growing medicines that are no longer patent-protected. In 2017, armed with three years of separate accounts, he will decide whether to implement a full split.
AstraZeneca
During the AstraZeneca takeover battle, Pfizer was accused of having a lacklustre drug pipeline, which critics blamed on historic cuts in research and development. But over the past 12 months, there has been a reassessment.
A partnership with Merck Serono of Germany in November gave Pfizer access to a “cancer immunotherapy” — a promising new category of tumour-fighting drugs being developed by AstraZeneca and others.
Then, in February, the US drugs watchdog took the unusual step of approving Ibrance, a new Pfizer breast cancer medicine, on the basis of a mid-stage study, instead of waiting for larger trials, because the results were so strong.
According to Jeffrey Holford, an analyst at Jefferies, Ibrance is on track to be “one of the fastest oncology product launches ever”. A survey of physicians suggested the drug would “smash consensus” forecasts to exceed $13bn a year in peak sales.
Yet, some analysts are still not satisfied. “For a company of its size, the pipeline is not strong enough,” says Vamil Divan at Credit Suisse, who argues that the company should buy new assets to plug the gaps.
The $17bn acquisition in February of Hospira, a US-based maker of copycat injectable drugs, was welcomed by investors. But it will do little to address Pfizer’s three big problems: high tax, trapped overseas cash, and patchy pipeline.
That is why many analysts and investors are still expecting a more dramatic deal. Mr Divan thinks it could come “in the next three to six months”, so there would be time to complete integration ahead of a split in 2017.
Andrew Baum, an analyst at Citigroup, says Pfizer has sent a clear signal that it is looking at “transformative deals or material acquisitions”, although he thinks financial engineering will trump pipeline when it comes to picking the target.
Following a US Treasury crackdown on inversions, which allow companies to slash their tax rate by taking over a rival in a lower-tax country and moving its headquarters there, Pfizer’s options are limited. To realise the main benefits of an inversion, its shareholders would have to own no more than 60 per cent of any combined company.
AstraZeneca
That would make AstraZeneca too small, according to Mr Baum, leading some to suggest Pfizer should shift its sights to another, bigger UK group — GlaxoSmithKline. However, this would risk even stiffer opposition from British politicians than the backlash which helped galvanise AstraZeneca’s defence last year. “They’ve got to find a non-US company where the government is not going to be protectionist, and where the risk [of inverting] is manageable — it’s a very short list,” says Mr Baum.
One contender could be Ireland-based Actavis. Its effective tax rate was just 4.8 per cent last year, and its limited roots in the Emerald Isle mean there would be no political outcry. Some even suggest that Brent Saunders, Actavis chief executive, could take the top job at Pfizer, allowing Mr Read, 62, to become chairman, and eventually retire.
“One of the carrots Pfizer can offer is the chief executive’s job. Ian is not terribly old, but he is certainly in the home stretch,” says Mr Baum. “It would be his crowning moment. I think this is the endgame.”