“Have you heard; Pfizer (PFE) is buying AstraZeneca (AZN)…” This is how the news that this report resulted in was reported to me by a family member. They had, they said, heard it on Fox, Pfizer was buying AstraZeneca, it would be huge. It turns out that that is not the case.
The story on Fox was taken from a Reuters report. In both the original and story and re-reporting of it, however, it seems that the tense of the verb in the headline was the problem. Reuters reported that Pfizer “mulls” a takeover of AstraZenenca, while Fox’s headline says that the New York based pharmaceutical giant “considers” such a move. In both cases, the past tense of the verb would have been more appropriate, as the original report (in the second paragraph) made clear. A Bloomberg article's headline more accurately described the situation; “Pfizer Said to Have Held Now-Dormant Talks to Buy AstraZeneca.”
As it turns out, you see, the story referred to the possibility of a takeover that was discussed about a month ago and rejected by AstraZeneca. No talks are currently taking place, according to subsequent reports. This amply demonstrates the biggest problem that traders and investors have when reacting to news. The immediate headline that you see or hear is quite likely misleading. I am not suggesting any deliberate attempt to mislead by either Reuters or Fox, but let’s face it, “ Two big companies talked about a merger a while ago” is more of a “dog bites man” headline than a “man bites dog” one, and is unlikely to produce much of a reaction.
Combine this with the fact that you are attempting to compete with people and computers that have an advantage in both access to the news and speed of reaction and you can see why my frequent advice to retail traders is to trade the reaction, not the news. This story emerged over the weekend, so by the time the first quotes came on AZN the story was already priced into the stock, which is up around 6% in early trading. Traders, it seems are convinced that there is more to come. I am not so sure. Given what we now know, I would be more inclined to sell than buy at these levels.
This particular story may have been headlined in a misleading way, but it did set me wondering, however, is some kind of mega-deal between pharma giants coming soon? The market’s reaction would indicate that dealers believe that we haven’t heard the end of this particular saga, and logically, the answer to that question in a more general way would seem to be yes. The struggles of big drug companies are well known; a series of patents for blockbuster drugs (particularly statins such as Crestor and Lipitor) have expired or are soon expiring. The global rise in medical costs has made the use of generics wherever possible increasingly common and increased the negative effects of that dynamic.
This is noticeable in the case of rival Merck (MRK), for example, whose annual EPS dropped over 27% from 2011 ($2.02) to 2013 ($1.47). The issue in the talked about PFE/AZN deal, however, is not past performance, but pipeline. One area where Pfizer has fallen behind rivals is in the development of immunotherapy treatments for cancer. This is still an experimental area and AstraZeneca is not as far advanced in the field as some others, most noticeably Bristol Myers Squibb (BMY) and the aforementioned Merck, but Pfizer’s interest shows the potential value of these drugs.
It is tempting to look at the problems of big pharma and conclude that, whatever happens, some kind of consolidation and huge deal are inevitable, but I am not sure that is the case. This would seem to be a very specific approach with some significant advantages for PFE. In addition to the pipeline fit, an overseas acquisition (AZN is a UK based company) makes sense for a company with a desire not to repatriate overseas profits to the US and make them liable to taxation. Pfizer has not been afraid of big deals in the past, including the $68 Billion acquisition of Wyeth in 2009, but the results of such deals have been questionable.
It could be that, at around $80 Billion at last week’s close, AstraZeneca is still vulnerable to a takeover bid, either a renewed on from Pfizer, or from elsewhere, but, for now at least, this particular deal looks dead. The recent severe correction in small bio-tech stocks has resulted in more reasonable valuations and made it more sensible for the large companies to look around for small targets that fit their pipeline needs. Given the potential regulatory problems that a huge merger would no doubt bring, I believe that this is now a more likely approach for Pfizer and other large pharma companies.
As usual, then trading the reaction will prove more profitable than coming late to trade the news. Selling AZN at this morning’s levels of around $67 makes far more sense to me than trying to react late to news; especially when that “news” is, itself, referring to something that happened a month ago!