Ding-Dong Ditch: AstraZeneca plans largest healthcare merger, before quickly abandoning

June 24, 2020

2 min read

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What's going on here?

UK based pharmaceutical giant, AstraZeneca, approached US rival Gilead Sciences over a potential merger, before later changing its mind.

What does this mean?

It is reported that AstraZeneca contacted Gilead in May to gauge its interest in a merger. AstraZeneca, which is valued at £110bn, recently became the UKs largest company by market value. Gilead is valued at around £74bn. 

It is reported that Gilead had discussed the merger with advisors but that there were no formal talks. The US company is reportedly not interested in selling or merging with other pharmaceutical companies and instead preferred to focus on partnerships and smaller acquisitions. 

If the merger had gone ahead it would have been the largest healthcare merger to date, bringing together firms at the forefront of the pharmaceuticals industry, and creating a company worth around £200bn. 

However, in response to the news AstraZeneca shares fell 2.7% as investors contemplated the large payout and questioned the rationale behind the merger. Shares of Gilead however rose 4.6%. 

As of Monday 8 June, AstraZeneca appears to have lost interest in the merger with Gilead.

What's the big picture effect?

The global pandemic has effectively killed the market for M&A and deals have been falling apart at a steady pace. Aside from being an odd time to start negotiations, news of this particular merger drew additional scepticism on Wall Street, and the rationale behind it was questioned by analysts. If AstraZeneca was looking to diversify its offerings, analysts considered that there were other targets which would be equally suitable and more acquiescent than Gilead. The once suffering US company is unlikely to be looking to merge as a result of improvement over the past years with strong operating and strategic performance. As a result a deal between these two companies would not align with the status quo for the pharmaceuticals industry where mergers tend to arise out of distress and underperformance

The proposed tie up would have also faced significant political hurdles, because governments are keen to scrutinise deals that will impact on the treatments available to their populations. In particular, trans-atlantic pharmaceutical mergers tend to be convoluted affairs, and this is only exacerbated by the COVID-19 pandemic. Gilead, the first company with an approved antiviral drug to treat COVID-19, is a valuable asset to the US. The company has secured government funding and it would therefore be very surprising if control of Gilead was passed to a non-US entity, particularly under the current administration which advocates onshoring to protect national interests. In line with this, analysts anticipated that the US administration would seek to block any acquisitions of US pharmaceuticals involved in the development of treatments for the pandemic. 

Though unsuccessful with this attempt, we could see a merger between AstraZeneca and Gilead in the future. Nonetheless, analysts view the attempt as a positive sign that companies are starting to look beyond the COVID-19 crisis. If this is the case, M&A markets ought to be up and running again soon!

Report written by Julie Lawford

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