Europe’s largest drugmakers may step up acquisitions of biotechnology companies this year after spending money in 2011 on stock buybacks and higher dividends to keep shareholders happy.
The value of acquisitions announced by Europe’s 10 largest pharmaceutical companies plunged to $2.1 billion in 2011 from $42.7 billion the year before, according to data compiled by Bloomberg, as drugmakers shunned the megadeals of 2010.
The industry faces the possible loss of $21 billion in sales this year from patent expirations, according to Bloomberg Industries, so the incentive to acquire companies to gain new products will grow, said Les Funtleyder of Miller Tabak & Co. Companies including AstraZeneca Plc (AZN), Novartis AG (NOVN) and Sanofi also had setbacks with drugs in development last month.
“Things going generic tend to encourage deal-making,” said Funtleyder, a New York-based money manager and author of “Health-Care Investing: Profiting From the New World of Pharma, Biotech and Health Care Services” (2009). “You can never have enough pipeline.”
There’s no shortage of cheap biotechnology stocks, according to Andrew Berens, a senior health-care analyst at Bloomberg Industries in Skillman, New Jersey. There are 18 development-stage biotech companies globally trading at or below two times the value of their cash holdings, according to data compiled by Bloomberg Industries.
In Europe, attractive candidates for takeovers include Copenhagen-based Genmab A/S (GEN), which has a research partnership with Glaxo and is trading at 1.33 times cash, and Stockholm- based Active Biotech AB (ACTI), for its Anyara and Tasq cancer treatments, said Peter Welford, an analyst at Jefferies International Ltd. in London.
Genmab has a market value of 1.57 billion kroner ($271 million), while Active’s value is 1.8 billion kronor ($249 million). Rachel Gravesen, a spokeswoman for Genmab, and Goran Forsberg, chief business officer at Active Biotech, declined to comment.
Last year companies focused on returning cash to shareholders. AstraZeneca announced a $5 billion stock buyback, the London-based company’s biggest ever. GlaxoSmithKline Plc (GSK), the largest U.K. drugmaker, said it would buy 2.3 billion pounds ($3.5 billion) of shares, its first repurchase since 2008, and raised its dividend four times. Paris-based Sanofi bought 1.1 billion euros ($1.4 billion) of stock.
Drugmakers stepped up share repurchases as the cost of developing new medicines rose 21 percent to $1.05 billion from $830 million a year ago, consulting firm Deloitte LLP said in a report in November. More drugs are failing in development and at later stages than a year earlier, and the commercial value of these assets is largely unchanged, Deloitte found, through a survey of the 12 drugmakers that spend the most on research.
On Dec. 20, AstraZeneca said it was dropping development of olaparib for ovarian cancer after a disappointing clinical trial result, and another drug failed in a study. Novartis stopped a test of its Tekturna heart medicine for safety reasons, while Sanofi said the experimental multiple sclerosis treatment Aubagio failed to beat an older therapy at preventing relapses.
The industry needs to improve performance through further “external innovation,” including early-stage alliances, joint ventures and risk-sharing partnerships, according to Deloitte.
Shire Plc’s $750 million acquisition of Advanced BioHealing Inc. was the biggest purchase announced last year by Europe’s largest drugmakers. Novartis of Basel, Switzerland, agreed to buy Genoptix Inc. for about $470 million and crosstown rival Roche Holding AG (ROG) bought Anadys Pharmaceuticals Inc. for about $230 million.
In 2010, Sanofi announced the acquisition of Genzyme Corp., a $20.1 billion deal that closed last year, and Novartis agreed to buy the rest of Alcon Inc. for $12.9 billion.
AstraZeneca’s U.S. patents for its second- and third- biggest-selling drugs, the Seroquel antipsychotic and Nexium for heartburn, expire in 2012 and 2014, respectively. The company will face an 8.6 percent drop in sales this year, the biggest decline among European drugmakers, according to a Bloomberg Industries analysis.
AstraZeneca is likely to resume acquisitions, spending as much as $5 billion over the next five years to gain broader access to low-cost medicines in emerging markets outside of China and Mexico, said Gbola Amusa, a London-based analyst at UBS AG.
“It’s not sustainable to charge higher prices than their multinational peers, and they charge significantly more than Glaxo and Sanofi,” he said.
AstraZeneca continues to focus on internal and external innovation through partnering, collaborations and in-licensing, said Isabelle Jouin, a spokeswoman for AstraZeneca.
“In terms of acquisitions, we’ve said all along that we are not looking for scale but would consider small, bolt-on acquisitions so long as there is a good strategic fit,” she said in a telephone interview.
Competitors are following similar strategies.
Diovan, Novartis’s biggest-selling drug, also may face generic competition in the U.S. in 2012. The company, which bought back $5.5 billion of stock last year and raised the dividend, is open to acquisitions of $2 billion to $3 billion this year of consumer health or veterinary assets, Chief Executive Officer Joe Jimenez said this week.
Novartis also would consider generic-drug, biotechnology or diagnostics purchases, he said last year. The company said today it will take $1.22 billion of charges to prepare for generic competition to Diovan and reflect lower sales potential for its Tekturna medicine.
Glaxo will stick to a strategy of “bolt-on” deals that fit with its existing businesses, Chief Financial Officer Simon Dingemans said in an interview this week. Paris-based Sanofi is planning acquisitions of as much as 2 billion euros this year, Chief Executive Officer Chris Viehbacher said in an interview this week.
Roche is open to a deal as big as $3 billion that could fit its focus on medicines sold alongside diagnostic tools, Chief Executive Officer Severin Schwan said in an interview last month. The company last year raised its dividend 10 percent.
Anadys, acquired by Roche last year, is developing medicines to treat hepatitis C. Gilead Sciences Inc. of Foster City, California, agreed in November to pay $11 billion, at the highest valuation on record, for Pharmasset Inc., another developer of hepatitis C drugs. More acquisitions in this disease area are likely to follow to seize a portion of a market potentially worth $20 billion by 2020, according to William Blair & Co.
“It’s a land grab right now,” said Berens of Bloomberg Industries.
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