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).
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