April’s M&A market produced the largest biotechnology deal ever
seen. Britain’s AstraZeneca plc (NYSE: AZN) announced that it is
buying MedImmune (NASDAQ: MEDI) for $58.00 per share, or $15.2
billion. In AZN’s sights are MEDI’s vaccine business and drug development
pipeline.
A charter member of the big pharma club, London-based AstraZeneca makes
and markets prescription pharmaceuticals in various therapeutic areas:
cardiovascular, gastrointestinal, neuroscience, oncology, respiratory,
inflammatory and infectious diseases and disorders. Its stable of top
sellers include Arimidex for hormonal breast cancer, Crestor
to manage cholesterol levels, Nexium for acid-related diseases,
Seroquel for schizophrenia and bipolar mania and Symbicort for
asthma. On a trailing 12-month basis, AZN generated revenue of $27.3
billion, EBITDA of $9.8 billion and net income of $6.2 billion. In 2006,
Nexium contributed $5.0 billion to revenue, Seroquel $3.4
billion.
But after a string of failed experimental drugs, including
candidates to treat stroke, heart disease and diabetes, AstraZeneca sorely
needs an injection of new drugs for its pipeline. Moreover, top performers
Nexium and Seroquel are confronting patent challenges. To
remedy this, AZN took a small step to diversify its products from
traditional chemical-based drugs into biologic medicines when it acquired
Cambridge Antibody Technology last year for $1.3 billion (3.4x
revenue). Biologic medicines, generally re-engineered from bacteria,
enzymes, human proteins or yeasts, tend to have fewer side effects than
their chemically-based counterparts, and have shown more success in
treating such diseases as cancer and multiple sclerosis. The plan to
acquire MedImmune gives AZN a more commanding presence in biotech
medicines.
Based in Gaithersburg, Maryland, MedImmune develops, manufactures and
commercializes products in the therapeutic areas of infectious disease,
inflammatory disease and cancer. Best known as the maker of the nasal
spray flu vaccine FluMist, it has two other marketed products:
Synagis for infectious respiratory disease and Ethyol for
reducing the side effects of chemotherapy and radiotherapy. And it has two
late-stage products in development. MEDI has links to both
GlaxoSmithKline (NYSE: GSK) and Merck (NYSE: MRK), since it is
entitled to royalties on sales of their rival HPV vaccines Cervarix
and Gardasil, much in the news lately. On a trailing 12-month
basis, MEDI generated revenue of $1.28 billion, EBITDA of $126.0 million
and net income of $49.0 million.
Though vaccines have historically been considered a low-margin,
low-growth business, recent developments have brought them front and
center once again. The addition of MEDI’s vaccine business gives AZN the
capacity to address key disease targets with small molecules, large
molecules or vaccines, particularly in the areas of infectious disease,
oncology and inflammation. With MEDI on board, the proportion of biologics
in AZN’s pipeline increases from 7% to 27%.
Under terms of the deal, AstraZeneca will offer $58.00 per share in
cash, or $15.6 billion. When the $340.0 million of cash that MEDI brings
with it is taken into account, the effective price falls to $15.2 billion.
Merrill Lynch & Co. acted as main advisor to AstraZeneca.
The lofty price to revenue multiple of 11.9x, in nosebleed territory,
is due in part to the fact that we’re dealing with a biotech and in part
to a "ferociously competitive" auction, conducted by Goldman Sachs.
Insiders say that at least four companies were involved in intense
bidding. While many analysts had penciled out a price of 8.0x revenue once
MEDI announced it had engaged Goldman (April 11), the 11.9x multiple is
probably calculated to deter counterbids, as it appears to be fully
priced. MEDI had been the subject of takeover speculation for much of the
year, especially when investor Carl Icahn disclosed in February that he
owned 2.8 million shares.
This deal offers MEDI shareholders a 21% premium over the stock’s
prior-day price, and a 53% premium to its share price the day before the
company announced it was up for sale. So MEDI shareholders, Mr. Icahn
included, make out very well indeed. AZN is financially fit, and seems
well-positioned to pull this acquisition off. Its larger sales force can
certainly wring additional revenue out of the drugs MEDI directly markets.
Further, two of its leading drug candidates are for superior formulations
of its existing marketed drugs, so the risk of a nonperforming development
pipeline seems relatively small.
This transaction naturally raises the question, Who’s next? Based on an
algorithm that excludes companies with market caps over $15.0 billion as
out of the reach of most buyers and under $250.0 million as too volatile
to stomach, Morningstar.com has identified a list of biotech
takeover candidates, including Amylin Pharmaceuticals (NASDAQ: AMLN),
BioMarin Pharmaceutical (NASDAQ: BMRN), MannKind (NASDAQ:
MNKD) and Vertex Pharmaceuticals (NASDAQ: VRTX). Their current
market caps are, respectively, $5.5 billion, $1.6 billion, $1.1 billion
and $3.9 billion.
The economic pressures prompting AZN to make a bid for MEDI are the
same ones faced by the rest of big pharma: loss of patent protection on
blockbuster drugs, dwindling pipelines from in-house R&D and generic
competition. Thus, while the exact identity of the targets may be
uncertain, it is certain that big pharma will continue to scour the
biotech industry for acquisitions and new sources of revenue. We also
believe it will be some time before a deal this big comes along again
(see the table on page 10 of the
issue).
