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Why Pfizer is willing to pay $100B for AstraZeneca

Shares of AstraZeneca (AZN), the maker of heartburn treatment Nexium and cholesterol medication Crestor, are up more than 10 percent after the company receiving an unsolicited $100 billion offer from Pfizer (PFE), whose stock also posted gains.

AstraZeneca, which is based in the U.K., last traded at $76.23 in the U.S., while Pfizer's stock changed hands at $31.87, indicating that investors support the deal. U.S.-based Pfizer first approached AstraZeneca in January, offering about $70, a 30 percent premium to where the share price was before buyout speculation drove it up.

AstraZeneca has declined to engage in discussions with Pfizer and says the U.S. company's offer is inadequate. A merger would create the largest health care company in the world. Pfizer would move its headquarters to the U.K., where the corporate tax rates are lower.

"They're sellers, we're buyers," Pfizer CEO Ian Read said according to Bloomberg News. "Of course they're going to say it's undervalued."

Pfizer values AstraZeneca at $78.28 dollars (46.61 British pounds). Polar Capital money manager Dan Mahoney told Reuters he expects Pfizer to raise its offer to between 50 and 55 pounds per share.

The potential Pfizer-AstraZeneca tie-up is the latest in a flurry of deal activity in the pharmaceutical and biotechnology sectors. Valeant last week moved to buy Botox maker Allergan for $45.7 billion. Novartis (NVS) this month acquired Glaxo cancers drugs for $16 billion and sold its vaccines business to the company for $7.1 billion. Ely Lily (LLY) also agreed to buy Novartis' animal health business for $5.1 billion.

The main things driving the deals is cost-cutting, potential tax benefits and gaining scale to better deal with payers," said Morningstar analyst Damien Conover in an email.

Acquiring AstraZeneca would bolster Pfizer's presence in key markets such as vaccines and rheumatologic arthritis, while also giving it a foothold in other markets such as diabetes and respiratory diseases. Like Pfizer, AstraZeneca faces the expiration of its patents on some of its best-selling drugs, including Crestor and Nexium. For its part, Pfizer may lose patent protection for its best-selling painkiller, Celebrex, 18 months sooner than expected if a recent court decision is upheld.

As Bloomberg News noted, AstraZeneca has a plethora of potential blockbuster drugs in the works, including targeted breast and lung cancer treatments and treatments called immunomodulators that help the body fight tumors.

"Literally, Pfizer is making a big bet on AstraZeneca's pipeline," said Mark Shoenbaum, an analyst with International Strategy and Investment, in a webcast with clients.

Pfizer, whose best-known product may be impotence treatment Viagra, may be trying to accelerate talks with AstraZeneca ahead of the May 30 meeting of the American Society of Clinical Oncology. Viagra's patent expired last year, and a flood of low-cost generics have entered the market.

The prospects of integrating such as a large acquisition isn't worrying Pfizer.

"We're satisfied that these large deals can be done and create value," Read said. "This is something society is requesting of the pharmaceutical industry. They want products faster and they want better value."

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