Plus or Minus? Examining AstraZeneca's Rejection of Pfizer's $119 Billion Acquisition Proposal

From DCAT Value Chain Insights (VCI)

By Patricia Van Arnum posted 05-20-2014 16:43


AstraZeneca's valuation of its pipeline and concerns over distractions to its R&D initiatives and progression of its drug candidates that would result from a mega merger was one major factor in the company's rejection of Pfizer's $119 billion proposal to combine the two companies. How strong is AstraZeneca's pipeline? DCAT Value Chain Insights examines the company's late-stage, mid-stage, and early-stage candidates.

 Leif Johnansson
AstraZeneca plc
In rejecting what Pfizer termed its final proposal to acquire AstraZeneca for nearly $119 billion, AstraZeneca rebuffed being a part of what would have been the largest acquisition in the pharmaceutical industry's history. AstraZeneca Chairman Leif Johansson said the offer did not fully value the company and represented a risk to its shareholders, which included concerns over the impact that the mega merger would have on its pipeline and R&D initiatives, as well as the tax-driven inversion structure of Pfizer's proposal.

The end of a deal (for now)
On May 19, 2014, AstraZeneca rejected the latest and what Pfizer said was its final proposal for acquiring AstraZeneca. On Sunday, May 18, 2014, Pfizer had reported that on Friday May 16, 2014, it had raised its proposal and cash portion of the deal to £24.76 ($41.64) in cash (45%) and 1.747 Pfizer shares (55%) per AstraZeneca share, representing a value of £55.00 ($92.53) per AstraZeneca share (based on the closing price of Pfizer shares on May 16, 2014) or approximately $119 billion.

In a statement issued on May 19, 2014, Leif Johansson, Chairman of AstraZeneca said: “Pascal Soriot [AstraZeneca CEO], Marc Dunoyer [AstraZeneca CFO], and I had a lengthy discussion with Pfizer over the weekend about the proposal Pfizer made on Friday evening at a value of £53.50 ($90.00) per share. During this discussion, Pfizer said that it could consider only minor improvements in the financial terms of the Friday Proposal. In response, we indicated, even assuming that other key aspects of any proposal had been satisfactory, that the price at which the Board of AstraZeneca would be prepared to provide a recommendation would have to be more than 10% above the level contained in Pfizer’s Friday Proposal. The Final Proposal is a minor improvement which continues to fall short of the Board’s view of value and has been rejected,” he said.

 Pascal Soriot
AstraZeneca plc

“Pfizer’s approach throughout its pursuit of AstraZeneca appears to have been fundamentally driven by the corporate financial benefits to its shareholders of cost savings and tax minimization," Johansson continued. "From our first meeting in January to our latest discussion yesterday [Sunday May 18th], and in the numerous phone calls in between, Pfizer has failed to make a compelling strategic, business or value case. The Board is firm in its conviction as to the appropriate terms to recommend to shareholders," he said. “As an independent company, the entire value of AstraZeneca’s pipeline will accrue to our shareholders. Under Pfizer’s Final Proposal, this value would be significantly diluted,” Johansson continued. “We have rejected Pfizer’s Final Proposal because it is inadequate and would present significant risks for shareholders while also having serious consequences for the Company, our employees, and the life-sciences sector in the UK, Sweden, and the US.”

AstraZeneca said it rejected the proposal due to the strength of its pipeline, near-term growth prospects, and long-range revenues in which it expects to reach annual revenues of $45 billion by 2023.The AstraZeneca board also noted other concerns with the proposed deal: expected cost reductions and a reduction in R&D potential and capabilities; "disruption" to the delivery and value of its pipeline; concerns over other large-scale acquisitions by Pfizer and the negative impact of integration on R&D productivity and output;and Pfizer’s announced business segmentation. The board also raised concerns over the tax-driven inversion structure of Pfizer’s proposal.

 Ian Read
Chairman and CEO
Pfizer Inc.
In making its final proposal, in its statement of May 18, 2014, Pfizer said the proposal expires May 26 and asked for the AstraZeneca board to extend the negotiations. Commenting on the proposal, in a statement on May 18, 2014, Pfizer's Read said: “We believe our proposal is compelling for AstraZeneca's shareholders and that a Pfizer-AstraZeneca combination is in the best interests of all stakeholders. We are excited at the opportunity to create a scientific powerhouse, delivering great benefits to patients and science in the UK and across the globe. We stand by our unprecedented commitments to the UK Government. We believe that the benefits to all stakeholders can only be maximized through cooperative engagement between both companies."

He added: "We have tried repeatedly to engage in a constructive process with AstraZeneca to explore a combination of our two companies. Following a conversation with AstraZeneca earlier today [Sunday May 18, 2014], we do not believe that the AstraZeneca board is currently prepared to recommend a deal at a reasonable price. We remain ready to engage in a meaningful dialogue, but time for constructive engagement is running out. We have said from the beginning that we will remain disciplined in the price we are willing to pay, and we will not depart from that guiding principle. We believe that our proposal represents compelling and full value for AstraZeneca and that other issues that have been raised by AstraZeneca do not represent material difficulties.”

On May 19, 2014 Pfizer issued a statement to clarify under what conditions, based on UK’s takeover rules and its own strategy, that it would raise its proposal to AstraZeneca. Pfizer stated that it will not make a hostile offer and will only announce a firm offer with the recommendation of the AstraZeneca board. Pfizer has until May 26, 2014 to make a recommended firm offer or make a statement that it does not intend to make an offer for AstraZeneca. That deadline can only be extended by the UK Takeover Panel at AstraZeneca’s request. Pfizer said it would only be allowed to increase its proposal if its share price and/or the dollar–pound exchange rate changes such that the indicative value of Pfizer’s final proposal would be less than £55.00 at the time of any firm offer announcement. In that case, then Pfizer has reserved the right to add further cash or Pfizer shares to its proposal to restore the indicative value of its offer to £55.00 (but no higher). Pfizer can also increase its proposal if another third party announces its intention to acquire AstraZeneca. Pfizer also may increase its proposal if AstraZeneca recommends to accept a proposal for acquisition.

On May 20, 2014, AstraZeneca issued a statement to "clarify" Pfizer's description under which Pfizer could raise its proposal. Leif Johansson, chairman of AstraZeneca said: “We have decided that it is necessary to issue a statement to make absolutely clear that Pfizer's final proposal, which the Board rejected, is not capable under the Takeover Panel rules of being increased or even suggested at being increased, privately or publicly, with or without the Board's approval or recommendation. This restriction that prevents further negotiation on value is a consequence of Pfizer's actions. The Board has made clear in its statement of  May 19, 2014 that it is not in the interests of AstraZeneca shareholders to recommend an offer unless the value of the company and its protected delivery to shareholders is properly represented by the amount and terms of the offer.”

Evaluating the pipeline
In rejecting Pfizer’s proposals, AstraZeneca has contended that Pfizer’s proposal did not adequately value its pipeline and future revenue prospects. In an investor briefing on May 6, 2014, AstraZeneca CEO Pascal Soriot outlined the company’s key late-stage, mid-stage, and early-stage pipeline candidates and expectations for growth. Its late-stage pipeline is focused on three key therapy areas: oncology; respiratory, inflammation and autoimmunity; and cardiovascular and metabolic diseases. By 2017, the company expects its revenues to be in line with its 2013 revenues as growth for certain drugs and new product launches are expected to counter the sales erosion resulting from current and future patent expiry of key products: the anticholesterol drug Crestor (rosuvastatin calcium), 2013 sales of $5.622 billion; the acid-reflux drug Nexium (esomeprazole magnesium), 2013 sales of $3.872 billion; and the antidepressant Seroquel (quetiapine fumarate), 2013 sales of $1.337 billion. In 2013, AstraZeneca posted 2013 sales of $25.711 billion, down 6% (reported in constant exchange rates) compared to 2012, according to the company’s annual filing. By 2020, Soriot said the company expects that it would have launched a least 10 new medicines compared to 2013 levels, and that after 2020, it will have a balance in primary and specialty care products. Overall, from 2017 to 2023 AstraZeneca is targeting revenue growth leading to annual revenues of greater than $45 billion by 2023.

That revenue growth will be driven by the company’s late-stage, mid-stage, and early-stage pipeline (see Tables I, II, and III). As of March 31, 2014, AstraZeneca had 11 new molecules in late-stage development (Phase III/Registration), which consisted of eight small molecules and three large molecules (i.e., biologics) (see Table I). It has 28 new molecules (15 small molecules and 13 large molecules) in Phase II development (see Table II at end of article) and 32 molecules (15 small molecules and 17 large molecules) in Phase I development (see Table III at end of article).

Table I: AstraZeneca’s Pipeline, Phase III/Registration: 11 Molecules (8 Small Molecules and 3 Large Molecules

 Small Molecules

Therapeutic Area Mechanism; Indication
selumetinib Oncology MEK inhibitor; solid tumors

olaparib Oncology PARP inhibitor; ovarian/gastric/breast cancer

lesinurad Respiratory, inflammatory & autoimmune diseases Selective uric acid reabsorption inhibitor; gout
PT003 Respiratory, inflammatory,& autoimmune diseases Long-acting beta agonist/ long-acting muscarinic antagonist; chronic obstructive pulmonary disease
PT001 Respiratory, inflammatory, & autoimmune diseases Long-acting muscarinic antagonist; chronic obstructive pulmonary disease
Epanova Cardiovascular & metabolic diseases Omega-3 fatty acids; hypertriglyceridaemia
naloxegol Neuroscience Peripherally acting mu-opioid receptor antagonist; Opiod-induced constipation
CAZ AVI Infection Beta-lactamase inhibitor/cephalosporin; serious bacterial infection
 Large Molecules

Therapeutic Area Mechanism; Indication
moxetumomab Oncology Anti-CD22 recombinant immunotoxin; hairy cell leukemia
brodalumab Respiratory, inflammatory, & autoimmune diseases Anti IL-17R mAb; psoriasis/psoriatic arthritis
benralizumab Respiratory, inflammatory, & autoimmune diseases Anti-IL-5R mAb; asthma
Pipeline as of March 31, 2014.

IL-5R is interleukin-5 receptor; IL-17R is interleukin-17 receptor; mAb is monoclonal antibody; PARP is poly (ADP-ribose) polymerase

Source: AstraZeneca

In assessing the potential value of its late-stage and mid-stage pipeline (inclusive of both new molecules and line extensions), AstraZeneca estimates risk-adjusted peak-sales potential of $23 billion and non-risk adjusted peak-sales potential of $63 billion by 2023. Peak-year sales are management estimates for the highest annual net sales of each new molecular entity (small molecule and large molecule) and key line extensions currently identified in Phase III, Phase II, and those in Phase I included in long-range planning (LRP) as launching before the end of 2023. Estimates are made based on customary forecasting methodologies used in the pharmaceutical industry. Many of the peak-year sales occur in years later than 2023, but are consistent with the plans and projections of the LRP period. Peak-year sales may occur in different years for each NME depending on trial outcomes, launch dates, and exclusivity periods among other things. The aggregation is for the peak-year sales of each NME and not for one particular year. The peak-year sales are net sales at nominal values and are undiscounted. Risk-adjusted peak-year sales are non-risk adjusted peak-year sales adjusted for the individual probability of launch of each NME and the probability of success in further lifecycle management trials. Estimates for these probabilities are based on industry-wide data for relevant clinical trials in the pharmaceutical industry at a similar stage of development. Non risk-adjusted peak-year sales are the aggregate of each of the peak year sales for all of the identified NMEs.

The company expects 19 NMEs to begin Phase III development in 2014/2015, with four to five candidates expected to move to that stage in 2014. These include: AZD9291 to treat non small-cell lung cancer, MEDI4736 for treating various solid tumors, tralokinumab for treating asthma, roxadustat (FG-4592) for treating anemia with patients with end-stage renal disease and chronic kidney disease, AZD3293 for treating Alzheimer’s disease, and mavrilimumab for treating rheumatoid arthritis. The company anticipates another 13 NMEs to reach Phase III development in 2015. These drugs are AZD4547 (gastric cancer), MEDI-573 (metastatic breast cancer), MEDI-551 (chronic lymphocytic leukemia), volitinib (AZD6094) (papillary renal cell carcinoma), AZD1775 (ovarian cancer), MEDI3617 (ovarian cancer), AZD9150 (diffuse large B-cell lymphoma), ATM AVI (serious infections), RDEA3170 (gout), sifalimumab/anifrolumab (systemic lupus erythematosus), PT010 (chronic obstructive pulmonary disease), AZD5069 (asthma), and AZD1722 (end-stage renal disease).

The company points to several late-stage and mid-stage drug candidates as near-term and future growth drivers. In oncology, it points to three drugs: MEDI4736 (including combination therapies), a PD-L1 monoclonal antibody for treating non small-cell lung cancer following chemoradiation; AZD9291, an irreversible inhibitor of epidermal growth factor receptor for treating various tumors and which received FDA’s breakthrough therapy designation; and olaparib, a poly ADP ribose polymerase (PARP) inhibitor to treat breast, ovarian, and gastric cancers. It estimates non-risk adjusted peak-year sales of approximately $6.5 billion for MEDI4736, of $3 billion for AZD9291, and of $2 billion for olaparib. In its respiratory, inflammation, and autoimmunity drug pipeline, the company points to three key drug candidates. These include two drugs to treat chronic obstructive pulmonary disease, PT003 and PT010, and benralizumab, a monoclonal antibody to treat severe uncontrolled asthma. It estimates non-risk- adjusted peak-year sales of approximately $4 billion for PT003 and PT010 and of $2 billion for benralizumab. And in the cardiovascular and metabolic disease franchise, a key offering is a fixed-dose combination of the diabetes drugs saxagliptin and dapagliflozin, which the company estimates non-risk- adjusted peak-year sales of approximately $3 billion.

In its investor briefing, the company pointed to four other drug candidates: brodalumab, a human monoclonal antibody targeting the interleukin-17 (IL-17) receptor, for the treatment of moderate to severe psoriasis; anifrolumab/sifalimumab for treating systemic lupus erythematosus; roxadustat/FG-4592 for treating anemia in patients with end-stage renal disease and chronic kidney disease; and AZD3293, a BACE inhibitor for treating Alzheimer’s disease. The company did not disclose estimates for brodalumab and roxadustat, but offered estimates for non-risk-adjusted peak-year sales of approximately $1 billion for anifrolumab/sifalimumab and of approximately $5 billion for AZD3293.

Concerns of losing momentum
In rejecting Pfizer’s proposal, AstraZeneca also expressed concerns that a potential mega merger would cause a disruption to its R&D efforts and uncertainty as to possible realignment and staff reductions in R&D. In making its proposal, Pfizer outlined certain commitments, which included having at least 20% of the combined company’s total R&D workforce in the UK going forward, completing the construction of the currently planned AstraZeneca Cambridge, UK campus, and basing key scientific leadership in the UK to lead all European and certain global R&D functions based in Cambridge. In June 2013, AstraZeneca announced that Cambridge, UK will be the location for the company’s new UK-based global R&D center and corporate headquarters. The new £330 million ($555 million) facility in Cambridge will bring together AstraZeneca’s small-molecule and biologics R&D activity. The purpose-built facility, which will be located in the Cambridge Biomedical Campus, is part of the AstraZeneca's previously announced plan to create strategic global R&D centers in the UK (Cambridge), US (Gaithersburg, Maryland), and Sweden (Mölndal) by 2016.

As of year-end 2013, AstraZeneca had 9,000 employees in its R&D organization across 11 principal sites in six countries. Its R&D geographic footprint includes four main small-molecule facilities in the UK (Alderley Park and Macclesfield), Sweden (Mölndal), and the US (Waltham, Massachusetts). In March 2014, the company announced the sale of its Alderley Park site in Cheshire, UK, to Manchester Science Parks (MSP), a Greater Manchester based public-private partnership and science park operator. The handover of the site will be phased over a three-year period, with the full exit of AstraZeneca R&D staff to take place in line with the completion of the company’s new facility in Cambridge. Also, in March 2014, AstraZeneca and UK’s Medical Research Council (MRC) formed a collaboration that will result in a new research facility to be built at AstraZeneca’s new R&D center in Cambridge, UK. Early this month, AstraZeneca and MRC formed a research fund for preclinical research projects with AstraZeneca contributing up to approximately £6 million ($10 million) and MRC LMB up to approximately £3 million ($5 million) over a period of five years, as well as in-kind scientific input to share knowledge and technologies. Additionally, AstraZeneca has a clinical development facility in Japan (Osaka). Its current principal sites for biologics R&D are in the US (Gaithersburg, Maryland and Mountain View, California) and in the UK (Cambridge). Its Wilmington, Delaware site in the US focuses on late-stage development across the entire therapeutic portfolio. It also has a research facility in China (Shanghai), and in January 2014, the company announced plans to close its R&D site in India (Bangalore).

Table II: AstraZeneca’s Phase II Pipeline: 28 Molecules (15 Small Molecules and 13 Large Molecules)

 Small Molecules

Therapeutic Area Mechanism; Indication
Oncology FGFR tyrosine kinase inhibitor; solid tumors

Oncology  Wee-1 inhibitor; ovarian cancer

AZD2014 Oncology mTOR serine/threone kinase inhibitor; solid tumors

selumetinib Oncology
MEK inhibitor; 2nd line KRAS-
non small cell lung cancer
AZD5363 Oncology
AKT kinase inhibitor; breast cancer

AZD5069 Respiratory, inflammatory, & autoimmune diseases CXCR2 antagonist; asthma
AZD2115 Respiratory, Inflammatory, & autoimmune diseases Muscarinic antagonist and a beta2receptor agonist; chronic obstructive pulmonary disorder
RDEA3170 Respiratory, Inflammatory, or autoimmune diseases Selective uric acid reabsorption inhibitor; gout

AZD4901 Cardiovascular & metabolic diseases Hormone modulator; Polycystic ovary syndrome

tenapanor Cardiovascular & metabolic diseases NHE3 inhibitor; end-stage renal disease /chronic kidney disease
roxadustat (AZD9941)
Cardiovascular & metabolic diseases Hypoxia inducible factor inhibitor; anemia in  end-stage renal disease /chronic kidney disease
AZD3241 Neuroscience Myeloperoxidase inhibitor; Parkinson's disease

AZD5213 Neuroscience
Histamine-3 receptor agonist; Tourette’s/neuropathic pain
AZD5847 Infection Active against gram-positive bacteria and mycobacteria; tuberculosis

CXL Infection Beta-lactamase inhibitor/cephalosporin; serious bacterial infection
 Large Molecules

Therapeutic Area Mechanism; Indication
Oncology Anti-IGF mAb; metastatic breast cancer

Anti-CD19 mAb; hematological malignancies

Anti-CTLA-4 mAb; mesothelioma

Anti-PD-L1 mAb; non small-cell lung cancer

Respiratory, inflammatory, & autoimmune diseases Anti-interferon-alpha mAb; systemic lupus erythematosus
MEDI8968 Respiratory, inflammatory, & autoimmune diseases Anti-IL-1R mAb; chronic obstructive pulmonary disease/HS
mavrilimumab Respiratory, inflammatory, & autoimmune diseases Anti-GM-CSFR mAB; rheumatoid arthritis
MEDI7183 Respiratory, inflammatory, & autoimmune diseases Anti-α4β7 mAb; Crohn’s disease/ulcerative colitis
Respiratory, inflammatory, & autoimmune diseases
Anti-IL-13 mAb; asthma and idiopathic pulmonary fibrosis
MEDI2070  Respiratory, inflammatory, & autoimmune diseases
Anti-IL-23 mAb; asthma and Idiopathic pulmonary fibrosis
anifrolumab (MEDI-546)
Respiratory, inflammatory, & autoimmune diseases
Anti-IFN-alphaR mAb; systemic lupus erythematosus
brodalumab Respiratory, inflammatory, & autoimmune diseases Anti IL-17R mAb; asthma
benralizumab Respiratory, inflammatory, & autoimmune diseases Anti-IL-5R mAb; chronic obstructive pulmonary disease
Pipeline as of March 31, 2014

CTLA-4 is cytotoxic T-lymphocyte antigen 4; CXCR2 is CXC-chemokine receptor 2
FGFR is fibroblast growth factor receptor; GM-CSFR is granulocyte-macrophage colony-stimulating factor receptor;
IL-1R is interleukin-1 receptor; IL-5R is interleukin-5 receptor; IL-17R is interleukin-17 receptor;
mAb is monoclonal antibody; MSRA is methicillin-resistant Staphylococcus aureus; mTOR is mammalian target of rapamycin
PD-L1 is programmed death ligand 1;

Source: AstraZeneca

Table III: AstraZeneca’s Phase I Pipeline: 32 Molecules (15 Small Molecules and 17 Large Molecules)

 Small Molecules

Therapeutic Area Mechanism; Indication
Volitinib (AZD6094)
Oncology MET tyrosine kinase inhibitor; solid tumors

Oncology  PIM kinase inhibitor; hematological malignancies

AZD9150 Oncology STAT3 inhibitor; hematological malignancies

AZD9291 Oncology
EGFR tyrosine kinase inhibitor; solid tumors

AZD8186 Oncology
PI3 kinase beta inhibitor; solid tumors

AZD6738 Oncology
ATR serine/threone kinase inhibitor; chronic lymphocytic leukemia; head and neck cancer
AZD8848 Respiratory, inflammatory, & autoimmune diseases Inhaled TLR7 agonist; asthma
AZD7624 Respiratory, inflammatory, & autoimmune diseases Inhaled p38 inhibitor; chronic obstructive pulmonary disease
AZD4721 Respiratory, inflammatory, & autoimmune diseases CXCR2 antagonist; chronic obstructive pulmonary disease
AZD1419 Respiratory, inflammatory, & autoimmune diseases TLR9 antagonist; asthma
Respiratory, inflammatory, & autoimmune diseases LABA/LAMA/ICS; chronic obstructive pulmonary disease
AZD3293 Neuroscience Beta-secretase inhibitor; Alzheimer's disease

AZD6423 Neuroscience
NMDA antagonist; suicidal ideation

ATM AVI Infection Monobactam/beta lactamase inhibitor; targeted serious bacterial infection
AZD0914 Infection GHyrAR; serious bacterial infections

 Large Molecules

Therapeutic Area Mechanism; Indication
Oncology Anti-DLL-4 mAb; solid tumors

Anti-CEA BiTE mAb; solid tumors
Anti-ANG-2 mAb; solid tumors

Murine Ox40 mAb; solid tumors

Oncology Anti-PD-1 mAb; solid tumors

MEDI4736 + tremelimumab Oncology Anti PD-L1 mAb + anti-CTLA-4 mAb; solid tumors
MEDI4736 + dabraf + trametinib Oncology Anti-PD-L1 mAb+ BRAF inhibitor + MEK inhibitor; melanoma
moxetumomab Oncology Anti-CD22 recombinant immunotoxin; pediatric acute lymphoblastic leukemia
Respiratory, inflammatory, & autoimmune diseases
Anti-B7RP1 mAb; systemic lupus erythematosus
MEDI9929 Respiratory, inflammatory, or autoimmune diseases
Anti-TSLP mAb; asthma
Respiratory, inflammatory, or autoimmune diseases
Anti-CD19 mAb; multiple sclerosis
MEDI6012 Cardiovascular & metabolic diseases LCAT; arterial thrombosis
MEDI8111 Cardiovascular & metabolic diseases Rh-factor II; trauma/bleeding
Infection mAb binding to S. aureus toxin; hospital acquired pneumonia/serious S. aureus infection
Infection Pediatric RSV vaccine; RSV prophylaxis
Infection Pandemic influenza virus vaccine; pandemic influenza prophylaxis
Infection H7N9 vaccine; avian influenza

Pipeline as of March 31, 2014

BiTE is bispecific T-cell engager; CTLA-4 is Cytotoxic T-Lymphocyte Antigen 4
CXCR2 is CXC-chemokine receptor 2; EGFR is epidermal growth factor receptor;
ICS is inhaled corticosteroid; IGF is insulin-like growth factor; LABA/LAMA is long acting beta(2)-agonists or long acting muscarinic antagonists; mAb is monoclonal antibody; NMDA is N-Methyl-D-aspartate; PD-1 is programmed cell death protein 1;
RSV is respiratory syncytial virus

Source: AstraZeneca

See related story, Pfizer and AstraZeneca: What Would a Combined Company Offer?
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05-22-2014 05:51

Pfizer being a serial acquirer is their preferred growth route (Pharmacia, Upjohn, Wyeth, American Hope Products, Searle, Warner Lambet, Parke Davis, Agouron, King) - will be interesting to see if AstraZeneca has the long term fortitude (translated into Shareholder support) to remain independent