AstraZeneca shares fall in London; according to the FT, a mega-merger with Bristol Myers Squibb is in the offing

(Il Sole 24 Ore Radiocor) - A decidedly lukewarm reception on the London Stock Exchange (FTSE 100 ) at the prospect of a mega-merger between AstraZeneca and the US firm Bristol-Myers Squibb. The market is reacting to revelations in the *Financial Times* that the two groups are negotiating a merger worth around $400 billion, which would create the world’s fourth-largest pharmaceutical group. So far, there has been no comment from the British pharmaceutical giant. Citing sources close to the matter, the FT reports that AstraZeneca and BMS have recently held talks on a merger that ‘could lead to an agreement in the near future, be delayed or fail’.

AstraZeneca is the second-largest British group by market capitalisation, with a value of approximately £190 billion (US$264 billion), whilst BMS is worth around US$133 billion. A merger deal – according to the FT – would strengthen AstraZeneca’s presence in the US, but would also heighten British fears that the country’s largest companies are moving away from the UK. It is no coincidence, it is noted, that AstraZeneca completed the process for a direct listing in New York in June, ‘a real blow to the London Stock Exchange’.

Meanwhile, several analysts have expressed reservations about the merger between the two groups. According to Jefferies, a potential merger between AstraZeneca and Bristol Myers Squibb could face antitrust hurdles due to the overlap in their portfolios and could also have political implications. As both companies have significant operations in the oncology sector, a deal could raise antitrust concerns and require divestments, they state in a research note. Furthermore, AstraZeneca would likely have to manage the political aspect of the deal to minimise friction, they add. “AstraZeneca would effectively become a UK-based acquirer of one of the largest US pharmaceutical companies, at a time when US politicians are focused on domestic production and strategic sectors,” says Jefferies. It is unclear why AstraZeneca would pursue the deal, but it could have the strategic aim of gaining a foothold in the US market and securing greater financial resources to allocate to research and development, Jefferies adds, noting that ‘beyond the regulatory hurdles, resources for the development phase could be sourced elsewhere, as AstraZeneca has already done, particularly in China’.

“It seems unlikely that the potential merger between AstraZeneca and Bristol Myers Squibb will go ahead,” write Bernstein’s analysts in a note. There are some reasons to support an alliance between AstraZeneca and BMS, given their complementary expertise in the fields of oncology and cardiovascular disease, but according to Bernstein, the deal seems unlikely. Large-scale mergers in the pharmaceutical sector tend to undermine productivity in research and development. Furthermore, AstraZeneca’s CEO, Pascal Soriot, is not in favour of restructuring programmes, and the British pharmaceutical company already has a solid pipeline that enables it to better address upcoming patent expiries, the analysts say.

According to JP Morgan analysts, AstraZeneca can achieve its 2030 revenue target under its own steam, through organic growth. “We find these unconfirmed reports surprising, as we remain confident in Astra’s ability to achieve its revenue target of $80 billion by 2030 organically, and we see a sufficiently broad pipeline to sustain growth beyond 2030”, JPM writes. Citi’s analysts believe that a merger would come as a surprise, particularly given AstraZeneca’s pipeline of products in development, which they consider to be the best in the sector. Whilst maintaining a ‘buy’ rating on the British pharmaceutical company’s shares, they also note that, given the market capitalisation of the two companies, this would entail a significant share issue for Bristol-Myers Squibb. They also believe that the two companies’ portfolios are complementary. According to UBS analysts, mega-mergers and acquisitions in the pharmaceutical sector have been a feature of previous waves of patent expiries, as they offered significant cost synergies to offset the decline in profits. The problem, however, is that research and development appears to have declined further during the post-merger reorganisation period, as employees naturally focused on the risks to their own jobs during the integration. The Swiss bank believes this is why activity has shifted towards targeted acquisitions. Whilst expressing some surprise at the news of the talks, UBS analysts are maintaining their ‘buy’ recommendation on AstraZeneca shares, with a target price of 17,600 pence.