Bottom Line: Mega-merger could lead to big break-up

 
Julian Harris
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IF THE financial crisis of 2007-08 taught us anything it’s that bigger does not necessarily mean better. The idea that corporate behemoths – let alone entire governments – are inherently safe from fiscal turmoil was blown to smithereens.

Pfizer’s advances towards Astrazeneca are therefore, with some justification, provoking concern among certain investors. Is this not simply a case of a struggling yet mega-cash-rich American giant gobbling up a smaller yet nimbler rival, in a desperate bid to fatten itself into a better state of health?

That may have seemed the likely story at first glance, yet closer examination shows that we should not judge Pfizer boss Ian Read’s plans so harshly.

Pfizer can be said to be in a spot of bother, sure. But while profits at the firm are falling, this is hardly a rare ailment in the pharma sector nowadays. Published a couple of weeks ago, Astrazeneca’s own first-quarter results revealed a 16 per cent dip in core operating profits, for example.

The Anglo-Swedish company is certainly bullish about its pipeline, with chief exec Pascal Soriot promising great things from two new drugs to treat lung cancer, yet who’s to say that such prospects are not already priced into the shares? Some analysts believe around a fifth of the valuation is down to future products.

And yesterday it was Read’s turn to big-up his company’s drugs-to-come, while also pledging that the takeover bid “is not a pipeline story per se”.

Perhaps he’s telling the truth, and perhaps there’s more to this bid than pipelines and tax arrangements. Yesterday marked the first time that Pfizer has divided its results into three sections: one for new innovations, one for existing products, and one for vaccines, oncology and consumer products. The firm is coy on whether this is the start of a huge break-up of the company into three distinct parts. Asked if buying Astrazeneca could precede such a split, Read said “we would preserve that optionality”. He’s hardly playing it down.

But there remains a small issue with the plan – the three divisions each recorded a drop in sales in quarter one. It’s all very well splitting things up, but these sections could use a shot in the arm, and that could be where Astrazeneca comes in.

Buying AZ might not be about fattening up, after all – it might be about adding muscle.

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