AstraZeneca Amarin-to-Forest Deal Seen on Lost Patents: Real M&A

AstraZeneca Amarin-to-Forest Deal Seen on Lost Patents
AstraZeneca, the maker of Seroquel, is set to lose patent protection by 2014 on drugs representing more than 40 percent of last year’s sales, and analysts are already projecting AstraZeneca will suffer a 30 percent drop in profit this year, according to data compiled by Bloomberg. Photographer: JB Reed/Bloomberg

AstraZeneca Plc’s need to restock its drug pipeline and boost the lowest valuation in the pharmaceutical industry is turning companies from Amarin Corp. to Forest Laboratories Inc. into takeover candidates.

The U.K.’s second-biggest drugmaker, which agreed this week to buy Ardea Biosciences Inc., is in talks with other companies about possible deals as it faces increasing generic competition, AstraZeneca’s head of business development said. The London-based maker of Seroquel and Nexium is set to lose patent protection by 2014 on drugs representing more than 40 percent of last year’s sales, and analysts are already projecting AstraZeneca will suffer a 30 percent drop in profit this year, according to data compiled by Bloomberg.

AstraZeneca, which has a market value of $58 billion, is searching for more deals as investors pay 6.3 times earnings to own its shares, the lowest multiple for any large pharmaceutical company, data compiled by Bloomberg show. Buying Amarin would give AstraZeneca potential revenue from a new heart medication that’s close to gaining U.S. approval, according to Sanford C. Bernstein & Co. Forest’s products would fit well with AstraZeneca’s existing offerings, said Liberum Capital Ltd.

The company “is certainly under pressure to take more action,” Seamus Fernandez, an analyst with Leerink Swann LLC in Boston, said in a telephone interview. AstraZeneca “would benefit from doing more M&A given the fact that they have a sustained sequential cliff of patents and their profitability is going to be under pressure,” he said.

Billion-Dollar Deal

AstraZeneca’s planned $1.26 billion purchase of Ardea, a San Diego-based maker of experimental gout and cancer treatments, marks its first acquisition of more than $1 billion since the $14.7 billion takeover of MedImmune Inc. in 2007, data compiled by Bloomberg show.

The company is also speaking with several other companies about possible licensing accords and acquisitions, Shaun Grady, head of business development, said in a phone interview after the Ardea deal was disclosed April 23. It would consider buying late-stage assets outside of its research and development focus on cancer, diabetes and gastrointestinal ailments, Grady said.

AstraZeneca will probably pursue additional acquisitions valued at about $5 billion to replenish its drug pipeline and make up for lost sales as its patents expire, Tim Anderson, a New York-based analyst at Bernstein, said in a telephone interview.

“The ideal is to find a company that has both revenues and some stuff in the pipeline,” Anderson said.

Possible Candidates

Amarin, a Dublin-based biotechnology company that’s developing a cholesterol drug; Forest, the New York-based maker of the Alzheimer’s treatment Namenda and other medications, and San Diego-based Amylin Pharmaceuticals Inc., which develops drugs for diabetes, are all possible candidates, he said.

Amarin shares climbed 2.4 percent today to $9.98. Forest added 1.5 percent to $34.05, while Amylin gained 2.5 percent to $26.20, its highest since August 2008.

When asked about potential purchases yesterday, Sarah Lindgreen, a spokeswoman at AstraZeneca, said the company would be open to conversations with “lots of” businesses.

“Our strategy includes looking for assets that fit with our business and that are in line with our strategy, but in terms of specifics we don’t comment,” she said.

AstraZeneca’s sales and profits are projected to fall as two of its best-selling drugs, Seroquel for schizophrenia and ulcer medication Nexium, lose patent protection by 2014. Seroquel and Nexium alone generated about $10.3 billion of sales last year, or about 30 percent of the company’s total, according to data compiled by Bloomberg. Crestor, its top seller with $6.6 billion in 2011 sales, must now contend with increased competition from a generic version of Pfizer Inc.’s Lipitor, which entered the market last year.

‘Worst Profile’

Profit is projected to drop this year for the first time since 2007, analysts’ estimates compiled by Bloomberg show, amid setbacks in its drug development, including the failure or delay of experimental treatments for diabetes, ovarian cancer and severe depression.

“AstraZeneca’s probably got one of the worst profiles out of all the pharmaceutical companies,” said Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New York. “A lot of the revenue is coming off patent and they don’t have anything in the pipeline because research and development has been very unsuccessful.”

The company’s stock traded at 2,837.5 pence ($46) yesterday, about 6.3 times last year’s earnings, according to data compiled by Bloomberg. That’s less than half the average of 15.2 times profit for 28 large pharmaceutical companies worldwide, the data show.

Shares of AstraZeneca rose 3.5 pence to 2,841 pence today.

Action Needed

“There’s a reason why the valuation is low,” Naresh Chouhan, a London-based analyst at Liberum Capital, said in a telephone interview. “It’s because earnings are declining and there’s no hope that it’s going to improve unless they do something else.”

AstraZeneca could buy Amarin and benefit from future sales of the $1.3 billion company’s cholesterol medicine AMR101, which is now under review by the U.S. Food and Drug Administration, Bernstein’s Anderson said.

“This would be very much a complementary product,” he said. “It’s cardiovascular and that’s the key area for Astra.”

David Schull, an outside spokesman for Amarin, declined to comment on takeover speculation.

‘Double Whammy’

A bigger target such as New York-based Forest could also be a good fit for AstraZeneca, said Liberum Capital’s Chouhan and Corey Davis, a New York-based analyst for Jefferies Group Inc.

Forest, valued at $8.9 billion as of yesterday’s close, is an attractive target for AstraZeneca because the companies overlap in researching and developing treatments for infections as well as respiratory and central nervous system diseases, Chouhan said.

The company has five medications in their third stage of development. It also filed new drug applications for treatments targeting pulmonary disease and irritable bowel syndrome, which may generate more than $1.2 billion in annual revenue in 2018 for Forest, data compiled by Bloomberg show.

“With more muscle, these products can be even bigger,” Davis said in a phone interview. “You get the double whammy of cutting the synergies from the acquisition, but also boosting the revenue estimates under a different platform.”

Davis said it would be “unreasonable” for Forest to sell for any anything less than $50 a share, a premium of about 50 percent to yesterday’s closing price of $33.54.

Amylin Attraction

Frank Murdolo, a spokesman for Forest, didn’t return a phone call and e-mail seeking comment on whether it would be willing to sell itself to AstraZeneca.

Amylin, with its injectable diabetes treatments, would also be an attractive target for AstraZeneca as the number of people suffering from the disease rises, said Scott Goginsky, a research analyst and money manager at Milford, Pennsylvania-based Biondo Investment Advisors LLC.

Amylin won regulatory approval in January for Bydureon, the once-a-week formulation of its Byetta drug, a twice-daily shot that was approved by the FDA in 2005. Revenue from the drugs may reach at least $1.5 billion, according to Ian Somaiya, a New York-based analyst for Piper Jaffray Cos.

While Amylin has reported losses since at least 1990, it would be a profitable business if it were acquired by a larger pharmaceutical company such as AstraZeneca, Goginsky, whose firm oversees $450 million and owns shares of Amylin in its Biondo Focus Fund, said in a telephone interview.

Rejecting Bristol-Myers

“Amylin is probably at the top of the list of potential buyouts,” he said. “For someone to come in and buy them and give them the needed scale and get rid of the redundant costs would probably be the best move.”

The company rejected a $22-a-share unsolicited bid from Bristol-Myers Squibb Co. in February, people familiar with the discussions, who declined to be identified because the talks were private, said last month. Amylin is now seeking a buyer, people with knowledge of the matter said this week.

Biondo Investment’s Goginsky said Amylin could fetch $32 to $35 a share in a takeover, or as much as a 37 percent premium to yesterday’s closing price of $25.55.

Alice Izzo, a spokeswoman for Amylin, said the company doesn’t comment on speculation, when asked whether it has been approached by AstraZeneca or is seeking buyers.

Instead of pursuing a deal, AstraZeneca may itself become a target because of its low valuation, according to Gbola Amusa, an analyst at UBS AG in London. An acquirer could unleash up to $53 billion of value by permanently shutting down AstraZeneca’s research and development efforts, Amusa wrote in an April 12 note.

Still, that would be a $58 billion purchase, without accounting for any potential premium.

Many big pharmaceutical companies are facing lost revenue from expiring drug patents and are looking to takeovers as a way to help fill in pipeline gaps, Bernstein’s Anderson said.

“AstraZeneca’s need just happens to be a little more substantial and acute than the other companies” he said.

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