How to Collect "Knock Out" Fees from Big Pharma
Rob Fannon, editor, Phase 1 Investor
February 08 , 2008
AstraZeneca had no choice but to overpay...
The company faced generic-drug competition for its top-selling "purple-pill" (heartburn drug Nexium), a bleak pipeline, and no skin in the lucrative biotech game. It was forced to shell out big bucks to stay competitive...
Last spring, the British drug company paid a whopping $15.6 billion for MedImmune.
Granted, the Maryland-based biotech had four drugs on the market, including a $1 billion "blockbuster" product called Synagis (which helps prevent respiratory infection in infants). But at 12 times sales, 300 times earnings, and a 60% premium to its stock price, the buyout was pricey – even by industry standards.
A few months ago, I found out why AstraZeneca had to pony up so much cash. At a trade conference I attended, MedImmune CEO David Mott spoke publicly about the deal for the first time. Mott explained that AstraZeneca was one of eight drug companies vying to buy the biotech.
Why so many? Because drugmakers are set to lose more than $67 billion in sales over the next five years, as three dozen top-selling drugs come off patent. This is roughly half of the industry's collective 2007 U.S. sales. Big Pharma hopes to fill the gap with promising biotech drugs. At the same time, these traditional drug companies are cutting costs...
AstraZeneca is second only to Pfizer in the number of jobs it's shedding. Nearly 11% of its workforce will be cut in the next two years, saving $900 million annually. Ironically, as AstraZeneca is cutting, MedImmune is growing...
Mott, who will remain the head of AstraZeneca's biotech arm, explained how his 2,700-person outfit had already added 300 new faces since the acquisition. The parent company hopes to have 25% of its pipeline in biotech drugs by 2010, so he expects his $400 million annual research budget will increase to more than $1 billion by the end of the decade.
In the end, AstraZeneca knew it had no choice but to pay top dollar for a chance to break in to biotech. The 60% bonus AstraZeneca gave to MedImmune's shareholders represented a "knock-out" acquisition premium – enough cash to kill the competition.
My Phase 1 Investor readers are familiar with such lucrative deals. In December 2006, Merck scooped up Sirna Therapeutics, one of our recommendations, at an overnight 100% premium. In the days and weeks after the deal, we learned that a handful of companies had been courting Sirna. Merck simply paid a price that scared everyone else off...
I fully expect the biotech buyout deals to increase through 2012. Bottom line is, as an investor, you need some exposure to the best biotech companies. In the coming year, these companies will be cherry-picked by struggling drugmakers desperate to fill their dwindling pipelines.
While Big Pharma stocks continue to flounder, biotech valuations will shoot through the roof. When the acquisitions do occur, investors will see large payoffs. Just ask MedImmune's David Mott... he took home $286 million.
Good investing,
Rob Fannon
Editor, Phase 1 Investor
