Pfizer has decided to continue talks to buy UK’s AstraZeneca after pulling back last week. While it might be one of the largest deals of its kind, it also shows that many drug companies are struggling to continue making money.
The Financial Times broke the news in a story by Ed Hammond and Andrew Ward:
Pfizer, the US pharmaceuticals group, has renewed its interest in a takeover of UK rival AstraZeneca, in what would be one of the global drugs industry’s largest ever deals.
The US group approached AstraZeneca, which has a market value of £51.5bn ($86.6bn), within the last week and could make a public declaration of its interest in a takeover as early as this week, said people familiar with the matter.
Going public would be a move designed to put pressure on AstraZeneca’s board to engage in discussions. Pfizer first telegraphed its interest four months ago, when it asked the UK group to consider a takeover. The overture was rebuffed, however, and no formal talks took place.
The exact value Pfizer is placing on AstraZeneca could not be ascertained, but people familiar with the matter said a bid would be likely to come in at more than $100bn. This would make it the biggest pharma deal since Pfizer’s $111.8bn takeover of Warner-Lambert in 2000.
People close to the situation cautioned that there was no guarantee of a public declaration by Pfizer.
The move comes at a time of renewed corporate activity in the sector as drugmakers look to deploy large cash piles and cheap debt to strengthen their positions in an increasingly competitive market.
The Wall Street Journal story by Dana Cimilluca and Jonathan D. Rockoff outlined some of the struggles both companies are having, particularly with aging drug pipelines:
In acquiring AstraZeneca, Pfizer could deploy its cash pile overseas. The company has been trying to find a use for its overseas cash, because bringing it back to the U.S. would mean a hefty tax bill.
But both companies are losing revenue, not growing. Each company’s revenue fell 6% last year; Pfizer had $51.6 billion in 2013 sales, while AstraZeneca notched $25.7 billion. And each is facing the loss of billions of dollars in additional sales over the next few years as more aging products lose patent protection.
AstraZeneca alone is staring at losing $12.3 billion in sales from existing products by 2022, according to ISI Group analyst Mark Schoenebaum. Pfizer’s Celebrex painkiller, which generated $798 million in sales last year, could start facing generic competition by the end of this year.
The fact that both Pfizer and AstraZeneca, each the product of mega mergers, is still coping with aging pipelines suggests that such big deals may provide an opportunity to cut costs but don’t always propel growth long-term.
Although showing promise, their pipelines of drugs in development are risky. And even when the companies have won approval for promising new drugs in recent years, the results have sometimes not met Wall Street’s expectations.
Last week, Oliver Staley wrote for Bloomberg about several deals that could remake the drug industry:
Novartis AG (NOVN) will focus more on cancer, GlaxoSmithKline Plc (GSK) on vaccines and Eli Lilly & Co. (LLY) on animal health as the drugmakers announced a series of deals for a total of as much as $28.5 billion today.
The transactions, as well as a plan to form a consumer-health joint venture with Glaxo, are part of an overhaul of the pharmaceutical industry spurred by the loss of sales as best-selling medicines lose patent protection. Pfizer Inc., the world’s biggest drugmaker, sold its infant-nutrition business to Nestle SA for $11.9 billion in 2012, and then last year spun off its animal-health unit.
Novartis agreed to buy cancer drugs for as much as $16 billion while selling most of the company’s vaccines division to Glaxo for $7.1 billion and its animal-health unit to Lilly for $5.4 billion.
It’s the biggest shakeup of Novartis since Chief Executive Officer Joe Jimenez took over in February 2010. The vaccines purchase is the largest for Glaxo since Andrew Witty became CEO in 2008. Lilly will become the second-largest animal-health company by sales.
“We’re talking about three companies swapping assets so that each can specialize in what they’re good at and make it even more profitable,” said Ori Hershkovitz, a managing partner at Sphera Funds Management Ltd. in Tel Aviv whose fund owns shares of all three drugmakers.
Caroline Copley and Paul Sandle wrote for Reuters that deals in the industry have nearly doubled:
In addition, Novartis is selling its animal health arm to Indianapolis-based Eli Lilly for about $5.4 billion in cash. That would make Lilly’s Elanco unit the world’s second-largest animal health business when that deal closes early next year.
A flurry of dealmaking has overtaken the global pharmaceutical industry recently as most large companies try to focus on a small number of leading businesses, while smaller specialty and generic producers seek greater scale.
Deal values have almost doubled since the start of 2014 to $77.9 billion from a year earlier, according to Thomson Reuters data.
The real question is whether or not the new companies will continue to innovate and make new drugs in their respective fields. It also will remain to be seen if this is good for investors and if there are actually cost savings to be had once the combinations are finalized. What is certain is that drugmakers need to find more ways to grow or risk falling out of favor.
