Pfizer’s possible offer for AstraZeneca plc represents compelling shareholder value

This is an announcement of a possible offer falling under Rule 2.4 of the City Code on Takeovers and Mergers (the “Code”). It does not represent a firm intention to make an offer under Rule 2.7 of the Code. Accordingly, there can be no certainty that any offer will ultimately be made.

• Rationale for a combination is compelling—strategic, financial and operational benefits

• Presents significant value creation opportunity for AstraZeneca shareholders
• Substantial premium and significant cash component
• Pfizer committed to developing and maintaining world class R&D capabilities
• Pfizer confident on deliverability of transaction
• Pfizer is keen to engage with the AstraZeneca Board

Pfizer today is publishing a presentation to the shareholders of AstraZeneca on the merits of a combination of the two companies. As indicated in its announcements on 28 April and 2 May 2014, Pfizer wishes to enter into discussions with AstraZeneca regarding a potential combination of the two companies and remains disappointed at the lack of engagement by the AstraZeneca Board. As laid out below, Pfizer believes there is compelling rationale for a combination and if AstraZeneca engages in conversations to provide Pfizer with a better understanding of its business and its prospects it may lead to a transaction that AstraZeneca can recommend. Pfizer continues to believe that engagement by the AstraZeneca Board is in the best interest of all stakeholders of both companies.

Compelling strategic rationale for a Pfizer/AstraZeneca combination:

Clinical, regulatory and reimbursement risks continue to increase the cost of drug development and the risk profile of the industry. Pfizer believes a combination of Pfizer and AstraZeneca would create an industry leader with the scale, operational efficiency, financial strength and breadth of portfolio to better address these challenges.

Pfizer believes there is strong strategic, operational and financial rationale for a combination:

• Strong strategic fit:
  Combination would enhance the innovative and established portfolios of both businesses; provide even more desirable product portfolio to enhance commercial position in key emerging markets and enhanced optionality to pursue future separation, though no decisions have been made.
• Strong operational fit:
  Combination expected to enhance global offerings for innovative business; strong combined R&D organisation and pipeline would support innovative growth; established business well-positioned to optimise portfolio lifecycles.
• Strong financial fit:
  Combination expected to create strong and consistent pro forma cash flow enabling continued investment in innovation and shareholder return; significant expected operational and financial synergies; efficient tax structure for combined operations and capital allocation; expected to be accretive to adjusted diluted EPS¹ in first full year and to accelerate adjusted diluted EPS growth thereafter²; ongoing value creation from anticipated operational and financial synergies.

AstraZeneca’s standalone business faces challenges:

• Predictability of revenue loss – major products with total 2013A sales of circa $14 billion³ facing near-term patent expiration.

• Uncertainty of revenue potential – attractive but high-risk early stage pipeline that still requires significant investment.
• Competitive commercial dynamics require significant investments while topline pressured by major loss of exclusivity (“LOE”).
• Major LOEs will pressure margins and ability to return capital to shareholders.
• Late-stage pipeline less differentiated than early-stage pipeline.
• Potential lack of sufficient scale to compete against large national players in emerging markets.

Pfizer’s business model with distinct innovative and established pharmaceutical businesses provides an opportunity to optimise AstraZeneca’s complementary portfolios. Combined business expected to have the financial strength and stable pro forma cash flow essential to support continued investment in science and innovation while driving shareholder value.

Pfizer is committed to world class R&D capabilities:

Pfizer has a strong track record of integrating science and business to deliver value to patients, the health care system and shareholders.

Pfizer’s key R&D priorities include:

• Delivering high-value medicines and vaccines – six therapeutic areas (Immunology & Inflammation, CV & Metabolic Diseases, Oncology, Vaccines, Neuroscience & Pain, Rare Diseases) plus biosimilars, with 80 projects in clinical development and 13 approvals over the last four years.
• Advancing leading capabilities across multiple therapeutic modalities.
• Collaborating to shape the health innovation environment.

Pfizer is reiterating its commitment to having at least 20% of the combined company’s total R&D workforce in the United Kingdom going forward and creating a substantial innovation hub in Cambridge and the wider scientific community.

Pfizer’s 2 May 2014 proposal offers AstraZeneca shareholders a significant and immediate value creation opportunity⁴:

Substantial premium to both AstraZeneca’s unaffected share price and analyst price targets.

• Pfizer’s 2 May 2014 proposal represents a 37% premium to the mean analyst price target as of 17 April 2014 of £36.56⁵.
• The proposal also represents a 32% premium to AstraZeneca’s closing share price of £37.82 on 17 April 2014 (the latest trading date preceding speculation of an offer by Pfizer for AstraZeneca).

Significant cash component.

Expected to be accretive to adjusted diluted EPS⁶ in first full year⁷ and ongoing value creation from anticipated operational and financial synergies:

• Expected strong and consistent pro forma cash flow enabling continued investment in innovation and shareholder return.
• Significant anticipated operational and financial synergies.
• Efficient tax structure for combined operations and capital allocation.

Pfizer is confident the transaction is deliverable:

• Pfizer has assessed this transaction in detail and is confident it can be implemented.
• Transaction to be structured in a way that meets all applicable legal and tax jurisdiction requirements.
• Pfizer would not be embarking on a possible offer, incurring significant cost, without a high degree of confidence on deliverability.

Pfizer continues to want to engage with AstraZeneca:

• AstraZeneca can work with Pfizer to help deliver optimal deal terms and structure.
• The possible offer put forward by Pfizer on 2 May 2014 was based solely on public information. Engagement would provide AstraZeneca management with the opportunity to provide Pfizer a better understanding of the business and its prospects, and the credible basis for their new long-range targets.
• Constructive engagement may lead to a transaction that AstraZeneca can recommend. Pfizer will continue to be disciplined on price.

The full presentation to AstraZeneca investors can be found at www.pfizerupdate.com.

References

1.  “Adjusted Income” and its components and “Adjusted Diluted Earnings Per Share (EPS)” are defined as reported U.S. generally accepted accounting principles (GAAP) net income attributable to Pfizer Inc. and its components and reported diluted EPS attributable to Pfizer Inc. common shareholders excluding purchase accounting adjustments, acquisition-related costs, discontinued operations and certain significant items. The adjusted income and its components and adjusted diluted EPS measures were not prepared in accordance with U.S. GAAP and are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS. We cannot predict the potential impact of any combination on reported diluted EPS in the first full year or thereafter.
2. This should not be taken as a statement regarding Pfizer’s expectations for its earnings per share for 2014 or subsequent periods.
3. Source: AstraZeneca Fourth Quarter and 2013 Full Year Results. Includes Nexium ($3.9bn), Crestor ($5.6bn), Seroquel XR ($1.3bn), Symbicort ($3.5bn). AstraZeneca financial information is reported in IFRS. No reconciliation to US GAAP is being provided.
4. 2 May 2014 proposed offer indicative value based on 1.845 Pfizer shares plus £15.98 per AstraZeneca share, and Pfizer closing share price of $31.15 and exchange rate of $1.00:£0.5919 on 1 May 2014.
5. Source: Bloomberg, AstraZeneca mean target prices includes target prices for ordinary shares, but excludes target prices for the ADR. Based on research analyst price targets released between AstraZeneca’s Q4 2013 earnings on 6 February 2014 to 17 April 2014, last trading day before Sunday Times article. Broker reports used includes: AlphaValue,17 April 2014; Berenberg, 17 April 2014; Helvea, 16 April 2014; Barclays, 14 April 2014; Jefferies, 14 April 2014; Bryan Garnier, 11 April 2014; Bernstein, 11 April 2014; Swedbank, 9 April 2014; Panmure, 7 April 2014; Credit Suisse, 4 April 2014; BNP Paribas, 2 April 2014; Deutsche Bank, 2 April 2014; Independent Research, 19 March 2014; Société Générale, 11 March 2014; UBS, 6 March 2014; Kepler, 27 February 2014; Danske Bank, 18 February 2014; Main First, 14 February 2014; Landesbank, 10 February 2014; Pareto Securities, 7 February 2014; Handelsbanken, 7 February 2014; Nordea, 7 February 2014; Morgan Stanley, 6 February 2014; and SEB, 6 February 2014. Mean analyst price target shall not be deemed to be a forecast, projection or estimate of the future financial performance or stock price of Pfizer, AstraZeneca or the combined business following completion of any possible transaction.
6. “Adjusted Income” and its components and “Adjusted Diluted Earnings Per Share (EPS)” are defined as reported U.S. generally accepted accounting principles (GAAP) net income attributable to Pfizer Inc. and its components and reported diluted EPS attributable to Pfizer Inc. common shareholders excluding purchase accounting adjustments, acquisition-related costs, discontinued operations and certain significant items. The adjusted income and its components and adjusted diluted EPS measures were not prepared in accordance with U.S. GAAP and are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS. We cannot predict the potential impact of any combination on reported diluted EPS in the first full year or thereafter.
7. This should not be taken as a statement regarding Pfizer’s expectations for its earnings per share for 2014 or subsequent periods.