AstraZeneca Bullish Options Gain on Pfizer Comeback BetsInyoung Hwang
Traders are snapping up bullish options on AstraZeneca Plc, convinced the prospect of a takeover is still on the table even as U.S. lawmakers threaten to crack down on tax inversions.
Pfizer Inc., which withdrew a $116 billion proposal to buy the London drugmaker after merger talks collapsed in May, was allowed to renew the process as of last week, according to U.K. takeover rules. The cost of bullish options on AstraZeneca’s U.S. shares reached its highest level ever compared with bearish ones, data compiled by Bloomberg show.
Traders are speculating the plan still has life even as some U.S. lawmakers seek to limit takeovers allowing firms to circumvent tax bills. The bullish options show willingness to bet Pfizer will take another shot, said SunTrust Robinson Humphrey’s John Boris in New York.
“The time period has expired so it’s logical that people would be speculating,” said Boris in an interview. “Pfizer is staring at some pretty challenging times going forward, and as a result they have no alternative but to make an acquisition, and AstraZeneca is one of the acquisitions most speculated.”
Pfizer has little to show for its research and development, and its business in the U.S., its biggest market, is shrinking. Since 2000, Pfizer has brought just three drugs to market that generate more than $1 billion in annual sales, according to data compiled by Bloomberg. Pfizer’s U.S. revenue was $20.3 billion in 2013, down from $21.3 billion in 2012 and $26.9 billion in 2011, the data show.
Calls betting on a 10 percent rally in AstraZeneca American depository receipts on Aug. 27 cost 14.1 points more than puts betting on a decline of that size, according to data on one-month contracts compiled by Bloomberg. That was the most since the figures started in 2005.
An inversion allows a U.S.-based company to lower its tax bills by acquiring a legal address abroad. Their popularity has been growing as European countries aiming to boost economic competitiveness slash corporate tax rates to lure U.S. companies.
Drug companies have been quick to jump on the trend. AbbVie Inc. bought Shire Plc in July for $55 billion and will move its legal residence to the U.K. Medtronic Inc. said in June it will pay $43 billion for Dublin-based Covidien Plc.
Pfizer’s bid for AstraZeneca faced political scrutiny in both companies’ home countries. The U.K. government sought guarantees that Pfizer would preserve British jobs, while President Barack Obama called mergers that circumvent taxes unpatriotic. The Treasury Department has said it’s reviewing options to discourage tax inversions.
A bigger snag was price. AstraZeneca demanded at least 58.85 pounds a share, almost 4 pounds more than Pfizer’s final proposal. AstraZeneca closed at 4,541 pence in London yesterday. The stock has rallied 27 percent this year as reports of Pfizer’s interest emerged in April.
The investment is too risky, said Jean-Francois Comte, managing partner at hedge fund Lutetia Capital in Paris.
“There will be more noise on this tax issue,” Comte, who manages about $153 million, said in an interview. “The thing everyone might also be forgetting with Astra is that there was a political problem in the U.K. as well, and it’s not like Astra was excited about the situation anyway. There are a lot of other opportunities in the market. I’m not playing this one.”
AstraZeneca is not the only potential big deal for Pfizer. The U.S. drugmaker is looking at other targets too, including Dublin-based Actavis Plc, people familiar with the matter have said, and traders are positioning for gains in the stock.
The cost of Actavis calls is near its highest level since May 2013 relative to puts. Bullish contracts cost 2.1 points more than bearish ones on Aug. 25, implied-volatility data compiled by Bloomberg show.
AstraZeneca spokeswoman Vanessa Rhodes declined to comment on the company’s options. Joan Campion, a Pfizer spokeswoman, also declined to comment. An Actavis representative didn’t return a call or e-mail seeking comment.
Traders held more bullish AstraZeneca options than bearish ones, with 259,833 calls at the end of last month for 138,817 puts, according to data compiled by Bloomberg. Of the eight most-owned options on the ADRs, seven were bullish. Calls betting on an advance to $80 by January had the biggest ownership, the data show.
Taxes aren’t the only reason Pfizer finds the acquisition compelling. The U.S. company has split into three internal units, two focused on developing new drugs, and another of off-patent and older medicines. Pfizer may be seeking a transaction to strengthen those businesses before separating them, said Tony Scherrer, director of research at Smead Capital Management.
“The pipeline build this deal would give to Pfizer’s global established pharma business is substantial,” said Seattle-based Scherrer. His firm oversees about $1 billion, including Pfizer shares. “From that angle, it’s a smart deal.”