Shire to Forest on Deal List for AstraZeneca: Real M&A

For AstraZeneca Plc to reverse its worst profit slide, the drugmaker needs to make its biggest purchase since at least 2007.

AstraZeneca reported a 37 percent drop in 2012 earnings and forecast profit this year will decline “significantly more than revenue” after the $59 billion company suffered setbacks in developing new therapies to replace best-selling drugs that are losing patent protection. While Chief Executive Officer Pascal Soriot said he will focus on internal efforts and purchases of $3 billion to $4 billion to help boost the lowest valuations in the industry, Exane BNP Paribas said only a “transformational deal” can return the company to growth.

Buying Shire Plc, an $18 billion specialty drugmaker, could help AstraZeneca fill the gap with patent-protected medicines for rare diseases and leading attention-deficit disorder therapies, Kepler Capital Markets said. Forest Laboratories Inc.’s lung treatment could bolster the company’s respiratory business, while closely held Bausch & Lomb Inc. would allow AstraZeneca to gain new revenue by branching into eye care, Kepler said. A deal for Shire or Forest would rival or top AstraZeneca’s acquisition of MedImmune Inc. for about $15 billion in 2007, according to data compiled by Bloomberg.

Photographer: JB Reed/Bloomberg

The cholesterol drug Crestor, AstraZeneca’s best seller, will lose U.S. exclusivity in 2016 and already faces competition from a generic version of Pfizer Inc.’s Lipitor. Close

The cholesterol drug Crestor, AstraZeneca’s best seller, will lose U.S. exclusivity in... Read More

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Photographer: JB Reed/Bloomberg

The cholesterol drug Crestor, AstraZeneca’s best seller, will lose U.S. exclusivity in 2016 and already faces competition from a generic version of Pfizer Inc.’s Lipitor.

“In order to buy time, they need to do a large acquisition,” Fabian Wenner, a Zurich-based analyst at Kepler, said in a telephone interview. “To me, that’s the only solution. People were devastated when they saw the 2013 outlook. The top and bottom line is only going one way -- down.”

Deteriorating Outlook

Vanessa Rhodes, a spokeswoman for London-based AstraZeneca, declined to comment yesterday on whether the company would consider pursuing a larger acquisition.

AstraZeneca’s outlook is deteriorating as it loses patent exclusivity on drugs that accounted for 40 percent of its peak revenue in 2011 of $33.6 billion.

The company’s second-best-selling drug, Seroquel for schizophrenia, lost U.S. patent protection last year, while the patent on Nexium for ulcers, its third-biggest seller, faces competition from generics in the U.S. next year. The cholesterol drug Crestor, AstraZeneca’s best seller, will lose U.S. exclusivity in 2016 and already faces competition from a generic version of Pfizer Inc.’s Lipitor.

AstraZeneca ended nine drug development programs since June 30, and the company’s sales are projected by analysts to decline every year through 2017, according to data compiled by Bloomberg. Profit is expected to fall again this year, the data show.

Pipeline Failure

“The pipeline hasn’t delivered,” Navid Malik, an analyst with London-based Cenkos Securities Plc, said in an interview. “Once they get through the patent cliff, they’re not going to have quality revenue growth.”

After AstraZeneca’s 1.3 percent stock gain made it the worst performer during the last 12 months among members of the Bloomberg Industries Large Pharmaceuticals Index, the company is valued at 8.7 times this year’s estimated earnings, according to data compiled by Bloomberg. That’s the lowest multiple among pharmaceutical companies with a market value higher than $10 billion, the data show.

Soriot, a former Roche Holding AG executive who took over as CEO of AstraZeneca in October, said in a Jan. 31 interview that the company planned to revive growth by focusing on its existing businesses, and supplementing development with acquisitions of about $3 billion to $4 billion and licensing deals of as much as $600 million.

Some Opportunities

While Soriot said AstraZeneca would consider “more disruptive opportunities if they materialize,” he called the possibility a “lower likelihood.” He will unveil the company’s strategy to analysts on March 21 in New York.

“There are opportunities but not many,” he said in the interview. “The challenge of course is to pay the right price and be able to add value to those. If you overpay, it’s really hard to justify.” AstraZeneca won’t risk its credit rating over a deal, he said.

Given the “substantial” scale of AstraZeneca’s coming revenue gap, acquisitions and partnerships “will be forthcoming and will not come cheap,” Credit Suisse Group AG analysts, including Luisa Hector and Kerry Holford, wrote in a Feb. 1 note. It could take purchases of $20 billion to make up the sales shortfall, according to their note.

New Treatments

Malik at Cenkos said AstraZeneca should consider a larger deal that could help the company expand into treatment areas such as cancer, infectious diseases, rare illnesses and biologics.

“They’ve got to buy something with infrastructure they don’t already have,” he said.

Shire, the world’s biggest maker of attention-deficit disorder drugs, is an attractive target that would offer immediate revenue and earnings growth, Malik said. It has a business selling orphan drugs -- therapies for diseases without other treatment options, giving them more patent protection --as well as Vyvanse, a treatment for attention deficit hyperactivity disorder which may generate $2.2 billion in sales by 2017, according to analysts’ estimates compiled by Bloomberg. Malik’s firm, Cenkos, holds Shire shares.

In addition to Dublin-based Shire, Kepler’s Wenner said Forest, with a market value of $9.4 billion, also could be a good fit for AstraZeneca because they both have treatments for infections and respiratory and central nervous system diseases.

Today, Shire gained 0.8 percent to 2,120 pence, while Forest climbed 0.7 percent to $35.74.

Bausch & Lomb would offer the company a way to diversify and gain revenue from eye-care products, such as contact lenses and solution, as well as generic and prescription drugs, he said.

For Sale

Bausch & Lomb’s owner, Warburg Pincus LLC, hired Goldman Sachs Group Inc. to explore the sale of the business, two people with knowledge of the matter said in December. Warburg is seeking at least $10 billion for the business, said the people, who asked not to be named because the process is confidential.

Jessica Mann, a spokeswoman Shire, and Frank Murdolo, a spokesman for New York-based Forest, said the companies don’t comment on speculation. Adam Grossberg, a spokesman for Bausch & Lomb, declined to comment.

AstraZeneca may be reluctant to make another purchase on the same scale as MedImmune and risk paying too much, said Lilian Montero, a health care analyst in Zurich with Julius Baer Group Ltd., which owns AstraZeneca shares.

“The ghost of MedImmune is still very much around,” Montero said in a phone interview. “I don’t see what acquisition they could do to fill their topline gap and not pay too much for it.”

No Time

Soriot’s desire to preserve AstraZeneca’s credit rating -- which is AA- by Standard & Poor’s, the fourth-highest level of investment grade -- could limit the size of any deal. Still, with $7.7 billion of cash and $10.3 billion in debt, the company could spend $10 billion without triggering a downgrade, said Olaf Toelke, a credit analyst with S&P.

“I would expect some quick changes,” Toelke said in a phone interview. “They’re running out of time. They really need to do something.”

Targets within the $10 billion range include Swiss drugmaker Actelion Ltd. With a market value of $6.2 billion, the company has an experimental drug for pulmonary arterial hypertension that’s awaiting market approval, Cenkos’ Malik said. Roland Haefeli, a spokesman for Actelion, declined to comment.

Today, Actelion fell 0.7 percent to 44.65 Swiss francs.

While AstraZeneca may prefer “bolt-on” acquisitions, only a transformational deal can return the U.K.’s second-largest drugmaker to growth, Exane analyst Nicolas Guyon-Gellin wrote in a Feb. 1 note.

“They’re going to have to spend a lot of money to get the assets that really count,” Malik said. “If they want to capture the imagination of shareholders, they should bite the bullet.”

To contact the reporter on this story: Allison Connolly in Frankfurt at aconnolly4@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Phil Serafino at pserafino@bloomberg.net

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