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AstraZeneca rejects higher ‘final’ offer from Pfizer

May 19, 2014, 3:03 PM UTC

FORTUNE — AstraZeneca has (AZN) rejected a sweetened takeover offer from Pfizer (PFE) in what the U.S. drug giant said was its final attempt to initiate a mega-merger.

AstraZeneca said the increased $117 billion takeover bid was still too low, blocking a deal that would have been the biggest foreign acquisition of a U.K. company.

“The final proposal is a minor improvement which continues to fall short of the board’s view of value and has been rejected,” Leif Johansson, chairman of AstraZeneca, said in a statement.

Pfizer said this is its final offer and it will not appeal to shareholders with a hostile bid. The deal expires on May 26 according to U.K. takeover law unless AstraZeneca’s board engages and extends the deadline.

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“We remain ready to engage in a meaningful dialogue but time for constructive engagement is running out,” Ian Read, CEO of Pfizer, said in a statement. “We do not believe that the AstraZeneca board is currently prepared to recommend a deal at a reasonable price.”

The upped bid is 10% more than Pfizer’s May 2 offer and includes a larger share of cash, which would give AstraZeneca’s shareholders a higher immediate payout. Based on the cash-and-stock offer, 45% and 55% respectively, Pfizer shareholders would hold 74% of the combined company while AstraZeneca shareholders would hold the remaining equity.

“As an independent company, the entire value of AstraZeneca’s pipeline will accrue to our shareholders,” said Johansson. “Under Pfizer’s final proposal, this value would be significantly diluted.”

AstraZeneca’s Johansson argues that the almost $92-a-share offer doesn’t account for the value of its drugs in development. However, many of its high-value pipeline announcements have been made, said Seamus Fernandez, an analyst with Leerink Research.

The value of AstraZeneca’s pharmaceutical innovations, which include seven cancer drugs nearing approval and two undervalued respiratory treatments, is “now fully realized with Pfizer’s offer,” said Fernandez.

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In order to move the company to the U.K. for a lower tax rate, which is expected to save Pfizer billions, at least 20% of the combined company’s shareholders must be from AstraZeneca’s original owners. This limits how low Pfizer can drop the stock proportion of its offer.

U.K. lawmakers have been critical of the offer and sought promises that Pfizer’s CEO would protect local jobs and invest in research and development facilities in the country. Pfizer has committed to keeping 20% of its R&D staff in the U.K. and will complete the innovation campus in Cambridge started by AstraZeneca.

AstraZeneca’s stock plunged 11% Monday morning in London, the largest intraday drop in more than 16 years.