Pfizer (PFE) and AstraZeneca (AZN) have confirmed that merger discussions occurred between them. While Astra rejected Pfizer's January $76.62 per share bid, saying the offer price was too low, we believe the deal is likely to occur and we are increasing our fair value estimate for Astra to $77 to match Pfizer's offer price. This exceeds our $56 estimate for the company on a stand-alone basis, but the likely cost-cutting and tax synergies should make Astra worth more to Pfizer than what we believe the company is worth on its own. We are keeping our fair value estimate for Pfizer at $30 per share for now, as not enough details have emerged to judge the impact on Pfizer's valuation, but we would expect a modest increase in valuation, given the sheer cost-cutting potential in the deal.
We would expect the combined entity to carry the wide moat rating that both firms currently hold. As governments and pharmacy benefits managers have gotten more aggressive with price negotiations, we believe the larger drug portfolio of the merged company should give it more leverage with payers.
Cost-cutting is probably driving this deal. Astra carries a relatively bloated infrastructure, with operating costs 1,100 basis points higher than Pfizer's. We estimate the combined company could easily trim more than 500 basis points off Astra's operating costs by incorporating Pfizer's low-cost operating strategy. Pfizer would structure the merger with an inversion to re-domicile to the United Kingdom for tax benefits, since Astra's current tax rate is 700 basis points lower than Pfizer's. Beyond cost cuts, Astra's presence in immuno-oncology would significantly increase Pfizer's strategy to build out its cancer pipeline.
