AstraZeneca selling future revenue rights

Is AstraZeneca selling future revenue rights in its quest to make itself acquisition proof? That is what is being rumored in much of the British media. The UK’s second largest drugmaker, which saw off a hostile takeover attempt by Pfizer, believes that by selling off some future revenue rights on existing medications it would become less attractive to predatory multinationals.

AstraZeneca is said to be discussing with bankers how it could sell off the rights to some future revenues. Apart from serving as an anti-takeover vaccine, the sale of some income streams of its current drugs would also boost its cash reserves, which could either be used to fund R&D, returned to shareholders, or both.

Will Pfizer try again?

On May 26, Pfizer officially announced that it had abandoned its AstraZeneca acquisition bid “Following AstraZeneca board’s rejection.” It had until May 26 to keep the offer process alive.

According to UK regulations, unless there is an AstraZeneca (AZ) invitation, which seems highly unlikely, Pfizer has to wait six months (November 2014).

AZ shareholders expect US lawmakers will have closed many of the tax loopholes which encourage domestically-based multinationals to acquire foreign companies so they can move their headquarters overseas and pay much less corporate tax.

By moving its headquarters to London, Pfizer would have been liable to just 21% corporate tax, compared to 35% in the US.

Several analysts think the Pfizer-AstraZeneca battle is not over. The difference between what Pfizer was willing to pay and what the AZ Board was asking for was quite small. A number of major AZ shareholders, including Black Rock, Legal & General, Axa, and Schroders seemed keen on the deal.

Other drugmakers have done this

Johnson & Johnson, Amgen, Biogen, and Idec have sold royalties for their existing medications to Royalty Pharma, a private equity company that specializes in pharmaceuticals.

AstraZeneca is also said to be considering selling non-core assets, doing partnership deals and making its own acquisitions. Earlier this year, AZ said it was reviewing its anti-infection and neuroscience divisions.

However, AZ CEO Pascal Soriot stressed that an outright sale was improbable, but this was before Pfizer pulled out. Now, AZ has to show its shareholders that he and the Board did the right thing.

AstraZeneca selling future revenue rights
Selling off some future revenue rights on current drugs would boost cash reserves and make AZ less attractive to firms set on acquiring it.

AZ’s short-term growth prospects are limited, as opposed to its long-term outlook. The company has to find ways to keep its shareholders happy. Over the last three years revenues have declined by almost a quarter as a number of medications patents expired. During the next 24 months, more drugs will lose patent protection.

TheStreet Ratings team gives AZ a “Buy” with a ratings score of B-. It believes AZ has more positives than negatives “and should give investors a better performance opportunity than most stocks we cover.”

The Street Ratings team list the following AZ strengths:

  • revenue growth,
  • a generally solid financial position,
  • by most measures reasonable levels of debt,
  • improving profit margins,
  • a solid performance in the stock market.

The end of tax inversion deals?

AZ’s rejection of Pfizer’s offer mirrors Shire PLC’s rejection of AbbVie’s $46 billion takeover approach. Most analysts believe they do not mean the end of tax inversion deals in Europe.

Both AZ and Shire said concerns regarding the execution of risk of a corporate inversion deal were one of the main reasons for turning down their suitors. Both European firms also said that the American companies undervalued their true worth.

Until corporate tax rates in the US are reduced in line with those in other advanced nations, the queue of tax American inversion candidates seeking foreign companies to buy is bound to grow.

The Council on Foreign Relations reported in a study that the American corporate tax system keeps money abroad.

AstraZeneca PLC is based in London, employs more than 51,000 workers worldwide, and reported revenue of $25.711 billion in 2013. It is the second biggest UK drugmaker and the seventh largest in the world.