Join our community of smart investors

Pfizer won't come back for Astra

For a start, the US Treasury has clamped down on so-called 'tax inversions', whereby US companies lower their tax bill - particularly on foreign earnings - by acquiring the operations and official headquarters of a rival in a lower-tax country. That has not killed off all deals with a tax motive. Medical devices group Medtronic (us: MDT), which has been based in Minneapolis since 1949, still wants to buy Covidien (us: COV), listed in New York but domiciled in Dublin. But, all else being equal, the clampdown makes transatlantic deals less attractive. Otherwise AbbVie (us: ABBV) would not have called off its bid for Shire (SHP) last month.

Rebuffed by Astra, Pfizer has also found another partner: last week it announced a tie-up with Merck KGaA (de: MRKX) - the German Merck, ancestor of the larger, independent US group - to share rights to a cancer drug under development. That suggests Pfizer no longer needs Astra, whose key operational attraction is its oncology pipeline.

Finally, chief executive Pascal Soriot has done an impressive job of talking up investor expectations for what an independent AstraZeneca can achieve. He reiterated some key financial targets at last week's investor day - including a return to growth by 2017 - and, crucially, said the late-stage drug pipeline was "well ahead of plan". So Pfizer would probably have to offer more for Astra than the £55 a share mooted in May, even as the financial attractions of a takeover have waned.

Pfizer and Astra aside, however, the deals will surely continue to flow. Near-misses have bagged the headlines, but it has still been a record year for the sector. Pharmaceutical merger and acquisition volumes have totalled $437bn so far this year, according to data provider Dealogic - the highest on record. Tax inversions have been just one driver.

Another has been - and remains - cheap money. The interest rate payable on debt is typically lower than even the most conservative estimates of return on equity, so debt-backed deals can be easily sold to shareholders as 'earnings-accretive'. The animal spirits of business confidence are also on the rampage after a five-and-a-half-year bull market in equities. Then there are the copycat deals: even cautious executives may be forced to act on the basis that they cannot afford to let smaller rivals merge into credible threats. Johan Utterman, a healthcare analyst turned fund manager at Lombard Odier, describes the current environment as "a bit of a land grab".

But there's also a non-financial reason for consolidation that executives have less cause to celebrate: falling prices. Healthcare budgets across the developed world are under pressure as governments grapple with deficits and their populations get older. Officials have to find ways to cut costs, and negotiating keener deals on drugs and equipment is an obvious place to start. This is particularly true in the crucial US market. The introduction of mass-market medical coverage - so-called Obamacare - has prompted hospitals to sharpen up their sourcing.

Of course, health systems will always pay up for innovation - a breakthrough treatment for prostate cancer, say, or a drug that reduces the risk of dementia. But tighter budgets will make it ever more difficult for doctors to justify paying top dollar for 'next generation' treatments that are only marginally more effective than cheap generic equivalents.

That's the problem facing Astra's UK peer GlaxoSmithKline (GSK), whose shares have fallen 11 per cent over the past year. News that the group bribed doctors in China has hogged headlines, but investors are probably more worried about disappointing sales of its new respiratory drugs, Breo and Anoro. The group is banking on these to replace its old blockbuster Advair, inhaled by asthmatics across the world, which accounted for 17 per cent of third-quarter sales. US patents associated with Advair expire in 2016.

The question is to what extent these problems are already in the share price. Glaxo's shares trade on 15 times forward earnings - about a fifth below the global peer-group average. My colleague Harriet Russell tipped the company at 1,356p in mid-October, when the prospective dividend yield was 5.9 per cent. Thus far, that recovery call has turned out to be well timed, and the company's blue-chip income profile is certainly compelling compared with low-yielding cash. But it's hard to get comfortable about investing for the long term in a group with so little promise of growth. Forget Astra - Glaxo is the UK pharma group in need of a transformational deal.