Dealing Drugmakers Gain as Reticent Rivals Lose: Real M&A
Drugmakers on an acquisition spree have created a combined $24 billion for shareholders this month, gains that will encourage even more dealmaking.
Pfizer Inc. (PFE) and GlaxoSmithKline Plc (GSK) are among pharmaceutical companies whose shares advanced after announcing $115 billion of acquisition plans since the end of March. In contrast, major drugmakers such as Roche Holding AG (ROG) and Bristol-Myers Squibb Co. (BMY) that have largely shunned this month’s takeover frenzy lost a combined $4.1 billion for their shareholders through yesterday, according to data compiled by Bloomberg.
Investors are supporting decisions by companies such as Pfizer, Glaxo and Valeant Pharmaceuticals International Inc. to dive into the deal boom and seize the best -- and biggest -- targets before they’re gone. More money has already been earmarked for industry purchases so far this quarter than in any other in the last five years, and there’s still two months left.
“It’s been like a game of Pac Man,” Timothy Chiang, an analyst at CRT Capital Group LLC, said in a phone interview. “I don’t know if it’s everybody waking up at the same time and having the same thought in mind that they need to buy as many companies as they can. But boards and executives see the opportunity, they don’t know how long it will last, so they’re taking advantage of it. And the market is continuing to reward them.”
Shire Plc (SHP) may be in play now as Allergan Inc. searches for a way to avoid being acquired, Sterne Agee Group Inc. said. Mylan Inc. has attempted to negotiate a takeover of Meda AB, while CRT Capital’s Chiang said Teva Pharmaceutical Industries Ltd. (TEVA) has everyone wondering whether it’s going to seek its own purchase.
The $115 billion of pharmaceutical deals that have been announced or reported so far this quarter are about $1 billion shy of the record set in the first quarter of 2009, data compiled by Bloomberg show.
Three main catalysts are driving the action: an increasingly popular tax inversion strategy, a desire of the industry leaders to become a one-stop shop for niche products and a hunger for growth and cost-cutting opportunities while interest rates are still low, Chiang said.
As acquirers’ stocks continue to surge on deal news, their peers are being given a reason to join in, said David Heupel, a Minneapolis-based fund manager at Thrivent Financial for Lutherans, which oversaw about $90 billion at the end of 2013.
“Looking at the reactions in the stocks, it certainly shows what investors really think of these kind of deals,” Heupel said in a phone interview. “If you can either have a lower tax rate or consolidate the industry, then you’re viewed as a winner right now.”
Among the winners is Pfizer, which as of yesterday was up 5.9 percent since April 17, the last day the stock traded before reports of its talks to acquire AstraZeneca Plc. That’s lifted Pfizer’s market value by about $11 billion, almost keeping pace with AstraZeneca’s increase, data compiled by Bloomberg show. Historically, acquirers’ stocks would fall and only the targets would rise.
New York-based Pfizer is considering its options after AstraZeneca spurned its $98.7 billion offer as too low. If the London-based target eventually agrees to the deal, it would create a company incorporated in the U.K. for tax purposes and run from New York.
Meanwhile, Pfizer’s peers that have been absent from the deal flurry this month are losing money for their shareholders. For example, about $11 billion has been erased from Roche’s market capitalization since March 31, the data show. Its last acquisition of size was Genentech Inc. for more than $40 billion in 2009. It also made a failed run at Illumina Inc. two years ago.
Bristol-Myers has lost $2.6 billion in market value this month through yesterday. The last time the company pursued large deals was in 2012 when it bought Amylin Pharmaceuticals Inc. and Inhibitex Inc. for a total of more than $8 billion.
Up until now, much of the industry’s takeover activity was led by specialty pharmaceutical companies, Chiang of CRT Capital said. Serial acquirer Valeant is trying to buy Botox-maker Allergan, and Actavis Plc is acquiring Forest Laboratories Inc.
“What we’ve seen so far has been mostly mid-tier specialty pharma companies, but now that Pfizer put its foot in the large caps are” involved, too, he said. “It tells you we’re definitely in this peak cycle for M&A.”
Glaxo, Novartis AG (NOVN) and Eli Lilly & Co. are also making moves. Novartis agreed to buy cancer drugs from Glaxo for as much as $16 billion, while selling most of its vaccines division to Glaxo and its animal-health unit to Eli Lilly. Glaxo and Novartis, which are also forming a consumer-health joint venture, have seen their market values increase by $7.7 billion and $461 million, respectively, data compiled by Bloomberg show.
Allergan, trying to fend off an unwanted bid from Valeant and hedge-fund manager Bill Ackman, could turn around and buy Dublin-based Shire as a vehicle for a tax inversion, Shibani Malhotra, a New York-based analyst at Sterne Agee, said last week. Allergan is preparing to approach Shire and may make an offer as soon as the next few days, Reuters reported yesterday, citing a person familiar with the matter.
While generic drugmaker Mylan has takeover ambitions, it’s struggling to get a deal done. Actavis rejected a bid from the company last year, and now Sweden’s Meda is doing the same.
Still, shareholders have been rewarding Mylan for its effort, with the stock up by about $300 million through yesterday since news of the rejected Meda offer. The company may attempt another approach, Yilmaz Mahshid, an analyst at Pareto Securities AS, wrote in a report yesterday.
Teva, the $47 billion Israeli company that was one of last year’s worst-performing drug stocks, also has been left out of the dealmaking, leaving analysts and investors wondering for how long that will be the case.
“Teva has been relatively quiet on the M&A front,” Chiang said. “They have said that they, too, at some point will come back into the M&A game though.”
Representatives for Allergan, Bristol-Myers, Shire and Mylan declined to comment, while a representative for Meda said the company had nothing further to say beyond its statement yesterday rejecting Mylan’s offer.
Representatives for Roche and Teva didn’t respond to requests for comment about their merger or acquisition plans.
The outperformance of dealmakers means companies that have sat on the sidelines so far owe it to investors to consider transactions of their own, said Elliot Wilbur, a New York-based analyst at Needham & Co.
“It makes it hard to not do deals where the only way your stock price goes up is if you do deals,” Wilbur said in a phone interview. “In this industry, value creation is often about acquisition. So to sit there and say that you don’t have to do a deal or you’re not going to do deals, I just don’t think is in the best interest of shareholders.”
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