The Board of AstraZeneca PLC (AstraZeneca) notes the announcement by Pfizer Inc. (Pfizer) of its final proposal (the Final Proposal), comprising £24.76 in cash (45%) and 1.747 Pfizer shares (55%) per AstraZeneca share, representing a value of £55.00 per AstraZeneca share (based on the closing price of Pfizer shares on 16 May 2014). This proposal undervalues the company and its attractive prospects and has been rejected by the board of AstraZeneca.
Leif Johansson, chairman of AstraZeneca said: “Pascal Soriot, Marc Dunoyer 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 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.”
“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 minimisation. From our first meeting in January to our latest discussion yesterday, 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.”
“AstraZeneca has created a culture of innovation, with science at the heart of its operations, which will continue to create significant value for patients, shareholders and all stakeholders of AstraZeneca.”
“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.”
“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.”
Background: After the close of business on 16 May 2014, the board received a letter containing a revised non-binding proposal from Pfizer comprising £21.57 in cash (40%) and 1.845 Pfizer shares (60%) per AstraZeneca share, representing a value of £53.50 per AstraZeneca share (based on the closing price of Pfizer shares on 16 May 2014) (the “Friday Proposal”). Pfizer's letter did not provide detail about other key aspects of its proposal, several of which are of importance to the board’s evaluation.
The board of AstraZeneca met on 17 May 2014 and concluded that the financial terms of the Friday Proposal substantially undervalued the Company and its attractive prospects. Accordingly, the Friday Proposal was rejected.
The board wrote to Pfizer on the evening of 17 May 2014 to confirm that the Board had rejected the Friday Proposal. The Board offered to hold a meeting with Pfizer to explain its views around the substantial shortfall in value of the Friday Proposal.
The Board also offered Pfizer the opportunity to explain the key aspects of its proposal that were not described in Pfizer’s letter, in particular four points central to the Board's concerns relating to value for AstraZeneca’s shareholders. These are:The business operating model and segmentation which would allow AstraZeneca to deliver on its research and development pipeline and prospects; and which would protect and preserve its culture of science and innovation, especially given the likelihood of material cost savings and research and development reductions; The details of Pfizer’s plans for cost savings, including around research and development, pipeline delivery and employment; Transaction execution risks, in particular Pfizer’s proposed tax inversion and regulatory clearances; and Pfizer’s plans for protecting the certainty of delivery of the value of any offer at closing.
Pfizer requested that this meeting be held by conference call. This conference call, between Leif Johansson (chairman), Pascal Soriot (chief executive officer) and Marc Dunoyer (chief financial officer) of AstraZeneca and Ian Read (chairman and CEO) and Frank D'Amelio (chief financial officer) of Pfizer, took place on the afternoon of 18 May 2014.
The chairman of Pfizer said that Pfizer could consider only minor improvements to the financial terms of the Friday Proposal. The chairman of AstraZeneca responded that, even if the other key aspects of the Friday Proposal had been satisfactory, 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. Pfizer stated that its Friday Proposal was final and would not be amended. As a consequence the discussion ended.
The board of AstraZeneca met on 18 May 2014 after this telephone discussion and reconfirmed its rejection of Pfizer’s Friday Proposal.
A few hours later, without prior notice to AstraZeneca and contrary to its previous statement, Pfizer announced its Final Proposal to the market. The board of AstraZeneca met again and rejected Pfizer’s Final Proposal for reasons set out below.
The board believes Pfizer’s proposals fail to recognise the transformation of AstraZeneca and its attractive long term prospects as an independent science-led company.
As set out in the presentation to shareholders on 6 May 2014: AstraZeneca has a growing and accelerating late stage pipeline, with aggregate risk-adjusted pipeline peak year sales potential of around $23 billion and non risk-adjusted pipeline peak year sales potential of around $63 billion; AstraZeneca's five key growth platforms are sustaining near-term growth, AstraZeneca remains confident that 2017 revenues should be broadly in line with 2013; AstraZeneca is targeting strong and consistent revenue growth from 2017, leading to annual revenues of greater than $45 billion by 2023; and AstraZeneca’s core earnings growth is expected to be in excess of revenue growth during the period from 2017 to 2023 as a result of operating leverage.
AstraZeneca has excellent momentum in the delivery of its clearly defined strategy, underpinning the Board’s confidence in long term revenue targets and profitability
AstraZeneca continues to demonstrate strong momentum across all elements of its strategy, as evidenced by multiple recent significant pipeline developments in its core therapy areas. These pipeline developments, announced in 2014 after completion of the Company’s 2013 Long Range Plan, underpin the Board’s confidence in AstraZeneca’s revenue targets due to increased probabilities of success for key oncology and other specialty franchise pipeline assets. As a result, AstraZeneca’s margins are expected to benefit from this improved revenue mix.
Given that AstraZeneca is at a point of inflection, the Board believes that selling AstraZeneca at the final price proposed by Pfizer would deprive shareholders of the value from potential future pipeline success. Accordingly, the Board believes short term metrics, including premia over historical share prices, as referenced by Pfizer regarding the attractiveness of its proposals, are not appropriate bases for assessing the value of AstraZeneca.
The majority of the consideration is in Pfizer shares which many AstraZeneca shareholders will be forced to sell. Further, for those AstraZeneca shareholders able to hold Pfizer shares, the Board believes Pfizer’s proposals would materially alter the investment case and create risks and uncertainties. In particular the Board believes: Pfizer’s proposals are predicated on the delivery of significant cost reductions and imply a meaningful reduction in research and development potential and capabilities; The associated integration would risk significant disruption to the delivery and value of AstraZeneca’s pipeline; Pfizer’s previous large scale acquisitions have highlighted the challenges around the negative impact of integration on research and development productivity and output; and Pfizer’s announced business segmentation, if it were applied to AstraZeneca’s business, would likely lead to value destruction.
In the context of the above, AstraZeneca notes the recent decline in Pfizer’s share price, which has fallen by 5.3% since the release of Pfizer’s Q1 2014 results.
The tax-driven inversion structure remains a key part of Pfizer’s proposals. The inversion structure has already been the subject of intense public and governmental scrutiny, particularly in the US, as a result of Pfizer’s possible offer for AstraZeneca. The Board believes this structure brings increased uncertainty as regards the delivery of value for AstraZeneca shareholders.
The Board believes that Pfizer’s Final Proposal, in relation to price, form of consideration and the four particular points that are central to the Board’s concerns around value, remains inadequate. Accordingly, the Board has rejected the Final Proposal.
This statement is being made by AstraZeneca without prior agreement or approval of Pfizer. There can be no certainty that an offer will be made nor as to the terms on which any offer might be made. Shareholders are strongly advised to take no action.