By Maggie Fick
LONDON, Aug 3 (Reuters) - AstraZeneca's shares fell as investors balked on Monday at reports of merger talks with Bristol Myers Squibb about forming what would become one of the world's biggest drugmakers with a combined value of nearly $400 billion.
Shares in AstraZeneca were down 4.8% at 1122 GMT, the second-biggest drop on the FTSE 100 index, as investors and analysts said Britain's biggest drugmaker had little obvious need for a transformative acquisition despite potential financial
benefits. Meanwhile, Bristol Myers shares were up about 5% in U.S. premarket trading.
If the two companies were to merge, it would create the world's fourth-largest drugmaker by market capitalisation and the largest by revenue, combining one of Europe's top pharmaceutical firms with a U.S. competitor.
A person familiar with the matter told Reuters that AstraZeneca and Bristol had held talks, confirming an earlier Financial Times report. On Friday, the two had a combined market capitalisation of nearly $400 billion, with AstraZeneca valued at $264.11 billion and Bristol Myers at $133.41 billion.
An AstraZeneca spokesperson declined to comment on Monday. Bristol Myers, which is headquartered in New Jersey, did not respond to a request for comment on Sunday.
Analysts and investors questioned the logic of a deal for AstraZeneca, which has been one of the most successful companies in the sector under long-time CEO Pascal Soriot.
"The only advantage for AstraZeneca in this rumoured combination with BMS seems to be to accelerate its U.S. footprint and sales," said Lucy Coutts, investment director at JM Finn, an AstraZeneca shareholder.
AstraZeneca, she said, was already doing this but at the "right pace and cost" for shareholders.
"On balance, BMS shareholders would be the winners of any combination with AZN and so this news will undoubtedly be received coolly by AZN shareholders," she added.
Although AstraZeneca this year completed a direct listing on the New York Stock Exchange, underscoring its focus on its biggest market and its aim of benefiting from higher U.S. valuations, a Bristol Myers deal would effectively mean a British company buying a major U.S. pharmaceutical champion.
ASTRAZENECA SHAREHOLDERS COOL ON MEGA-MERGER PLANS
"A combination with Bristol does not make strategic or financial sense," said Markus Manns, portfolio manager at Union Investment, an AstraZeneca shareholder.
Soriot had, over 14 years as CEO, prioritised research and development over cost-cutting and a deal "would deeply disrupt a well-run company with a full pipeline", Manns added.
Lukas Leu, portfolio manager at AstraZeneca shareholder ATG Healthcare, said a deal could boost margins through cost synergies and expand reach in neuroscience and cell therapy, but questioned how a combined firm would position competing drugs.
"I am not a big fan of mega-mergers, it kills innovation and agility, and would be growth-dilutive for AstraZeneca in the near term," he said.
PIVOT TOWARDS UNITED STATES
One attraction for AstraZeneca could be further expanding its presence in the United States, already its biggest market.
Bristol Myers derives the majority of its revenue from the U.S., where it has one of the largest commercial footprints.
A portfolio manager at a top-20 AstraZeneca shareholder, who commented on condition of anonymity, said that while "there may be an appeal to increasing U.S. exposure", such a deal "would be a surprise given Astra management has consistently backed the business to grow organically through R&D delivery".
"Consensus is that Astra has a stronger pipeline and less patent expiry pressure than BMS, so why dilute that and reduce the growth outlook?"
Since President Donald Trump returned to office, AstraZeneca has invested tens of billions of dollars in U.S. manufacturing and cultivated close ties with the administration as it pursues an ambitious goal of generating half of its targeted $80 billion in annual revenue by 2030 from the U.S. market.
It generated about $59 billion in revenue last year.
MARKET BEWILDERED BY REPORTS OF TALKS
Jefferies analysts said in a note they were puzzled by the reports of talks given AstraZeneca has a strong "growth and innovation profile". "If there is one company that doesn't need financial engineering, it's AstraZeneca," they wrote.
Sean Conroy, an analyst at Shore Capital, said a deal could help AstraZeneca address the patent cliff it faces after 2030 and strengthen its oncology business, although he cautioned that investors were "not often fans of mega mergers of this ilk".
He added that overlap between Bristol Myers' Opdivo and AstraZeneca's Imfinzi, which are the same type of cancer immunotherapy drugs, could attract antitrust scrutiny.
"If the merger rumours prove to be true, this would represent the pharmaceutical industry's equivalent of the FIFA privatisation moment," added Manns, referring to now abandoned plans to sell off a World Cup stake. "(That is to say a) poorly conceived proposal that would be met with considerable bewilderment by many market participants."
(Reporting by Maggie Fick in London, Prerna Bedi and Pushkala Aripaka in Bengaluru; Editing by Nivedita Bhattacharjee, Janane Venkatraman and Alexander Smith)
