By Hester Plumridge 

LONDON-- AstraZeneca PLC Monday rejected what U.S. peer Pfizer Inc. said was its final increased offer, seeming to scuttle what would have been a huge trans-Atlantic pharmaceutical merger and sending its shares plummeting as much as 15%.

Late Sunday, Pfizer made a final offer for AstraZeneca valued at about $120 billion, or GBP55 ($92.51) a share with a 45% cash component, after the British pharmaceutical company rebuffed its latest effort to enter takeover talks.

AstraZeneca said it made clear on a phone call to Pfizer Sunday afternoon that an offer more than 10% above the GBP53.50 Pfizer offered Friday--which would equate to a figure greater than GBP58.85--would be needed to secure the board's recommendation. A few hours later, Pfizer came back with its "final" offer of GBP55 a share.

The U.K. drug company's shares recovered somewhat from their worst levels of the session but lately were down 10.5% to GBP43.18 in London trading.

While the rejection is a near-fatal setback in any potential deal between the two drug giants, U.K. takeover rules give Pfizer and AstraZeneca until May 26--four weeks from the confirmation of Pfizer's earlier approach--to enter takeover discussions. That allows time for any investors dismayed with AstraZeneca's large share-price fall Monday to push the board to engage in talks.

Pfizer cannot come back with an offer higher than GBP55 before May 26 unless the AstraZeneca board agrees to talks, and it has pledged not to pursue a hostile bid. If AstraZeneca were to recommend the current bid before that date, Pfizer could improve the terms of its current offer three months later, according to the takeover rules.

"I think effectively what they're trying to do is turn up the heat on AstraZeneca shareholders in the hope that they will bring pressure to bear on the board," said Simon Allport, head of international public securities at law firm Bird & Bird.

"I think this rejection will go down poorly with investors who are urging AZ to engage with Pfizer," Credit Suisse said in a note to clients Monday, adding that investor feedback was that the GBP55 level was fair. "Investor pressure on AZ really now becomes key in this process."

One top-10 shareholder who had been pushing last week for the AstraZeneca board to engage with Pfizer reacted with displeasure to the rejection. "This looks to me like a case of blatant disregard of shareholder interest," the shareholder said.

"We have engaged deeply with Pfizer, we have really tried to understand what the values for our shareholders are," AstraZeneca Chairman Leif Johansson said Monday in an interview with The Wall Street Journal, adding the offer was rejected because it "does not meet the value that we would put on a stand-alone company." The board's decision was unanimous, a person close to the company said.

Mr. Johansson highlighted concerns over the U.S. tax implications of a deal as a key execution risk, playing down U.K. regulatory risk. "In the end, in the U.K., it is for shareholders to decide whether they want to sell their company," he said.

Pfizer is seeking to acquire AstraZeneca in a so-called inversion deal, a kind of merger in which a U.S. company changes its domicile to the relatively tax-friendly home of its target. The U.S. drug giant hopes to reduce its annual tax bill sharply by changing its domicile to the U.K., but U.S. lawmakers have said they might seek to discourage further inversions.

Mr. Johansson said he had "great respect" for the plurality of shareholder views on a deal. The board will continue to meet with investors Monday, as it did last week, he added.

Large investors Aberdeen Asset Management PLC and Investor AB have previously voiced public support for the AstraZeneca board. Aberdeen Chief Investment Officer Anne Richards said Monday that the latest offer "certainly wasn't a knockout," and cited risks about takeovers disrupting research and development.

A spokesman for Aberdeen said Monday the company was continuing to meet with both companies to discuss the situation. Investor AB couldn't be reached for comment.

"They can either accept it or reject it," Pfizer Chief Executive Ian Read said Sunday in an interview with The Wall Street Journal. "They have until the 26th of May."

"They seem to have quite a punchy view of what their pipeline is worth," said Dan Mahony, a health-care fund manager at Polar Capital and a small AstraZeneca investor, adding he was frustrated with the rejection. "I don't think GBP55 was too unreasonable, to knock it completely out of the park again."

Mr. Mahony said he doubted another bidder would emerge, and that he didn't see Pfizer returning with another offer.

"I get the impression Pfizer will just walk," he said. "I think a lot of these companies are more financially disciplined than they were 15 years ago."

Mr. Mahony added that AstraZeneca management was now in a difficult position if it failed to live up to ambitious new sales targets in coming years. "The next three years are going to be really tricky for them as [cholesterol drug] Crestor goes off patent."

Both companies are grappling with aging portfolios and losing billions of dollars in sales to generic competition. Each company posted a 6% drop in sales last year. Pfizer's sales fell to $51.6 billion, while AstraZeneca's dropped to $25.7 billion.

AstraZeneca shares closed Friday at GBP48.23, valuing the company at GBP60.89 billion.

Jonathan Rockoff and Ian Walker contributed to this article.

Write to Hester Plumridge at hester.plumridge@wsj.com

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