Health

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

AstraZeneca shares are getting a boost from speculation the Anglo-Swedish drugmaker might be taken over by Swiss rival Novartis. If the company does get an approach, it would be far harder to rebuff than Pfizer's failed advances of 2014.

Shot in the Arm
AstraZeneca's shares have gained on speculation the drugmaker may be acquired
Source: Bloomberg

Astra's attraction is its pipeline of potential future medicines. Tactically, it would make sense for a bidder to secure a deal now ahead of a raft of regulatory and clinical news due in the next 12 months.

At first sight, that timing seems odd. But if a buyer really believes there is value in Astra, it would be wise to bid while shareholders are still uncertain. And if evidence were to emerge proving the quality of that pipeline, enough merger arb funds should have built a stake in the company to ram any deal through. Similar dynamics kept AB InBev's bid for brewer SABMiller on track even after Brexit.

Excuses, Excuses
AstraZeneca has underperformed Pfizer since rejecting its U.S. rival's advances in 2014

Astra's shares are at a convenient level, even after getting a boost from sterling's recent devaluation. Before bid speculation started, the stock traded at about 45.50 pounds a share in July. An offer which included a standard 30 percent takeover premium would be almost bang on the 58.85 pounds Astra said was acceptable two years ago. Such a bid would value the company at 74 billion pounds ($98 billion). The premium would be 17 billion pounds, roughly the net present value of the $3.5 billion of annual pretax cost savings that Citigroup analysts estimate Novartis could extract by 2020.

Of course, Astra would argue that its fundamental worth is now higher. It isn't the same business it was. But the board's credibility is weak. Two-and-a-half years since Pfizer, the stock surely ought to have risen to the 55 pounds that Astra rejected. In fact, the stock was at 39 pounds just before Brexit, a fall of 9 percent in the period. By contrast, Bloomberg's Europe 500 Pharmaceuticals Index advanced 8 percent.

Not This Year, Not Next Year
AstraZeneca's sales are nearing their trough
Source: Bloomberg, company reports

Meanwhile, Astra has used up the toolkit. Dazzling performance targets? Done. The company has promised to hit $45 billion of revenue by 2023. It's hard to see this getting revised higher -- it's already a stretch, as Gadfly's Max Nisen has argued. Cut costs? That's happening. Take on debt and pay out the cash? No need, given the company's generous dividend.

Astra could still replace management -- but CEO Pascal Soriot was himself brought in to lead a turnaround in 2012. Right now, it's not obvious what another boss would do differently.

Maybe new U.K. Prime Minister Theresa May would block a deal. But Astra shouldn't count on it. Look at the warm welcome ARM's buyer, Softbank of Japan, received after promising to create more jobs.

This all means that Astra's standalone defense would have to be to persuade investors to wait and see what the next year of approvals and data bring. Call it the please-wait-just-a-bit-longer strategy.

The unfortunate reality is that Astra didn't win the bid battle of 2014 -- Pfizer lost it. The U.S. bidder made its final proposal on a weekend, and Astra was able to reject the approach before the stock market could rally behind it and force a deal.

Astra can only hope that a new suitor, if one exists, is equally careless.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net