Health

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

There are good reasons for AstraZeneca Plc to want to make acquisitions. The snag? The British drugmaker is in a weak position to be a buyer.

A report that AstraZeneca tried last year to acquire Japan's Daiichi Sankyo Co., a deal that would cost at least $16 billion, was denied by the putative target on Thursday. But the market took it seriously enough to send Daiichi shares up by the most in nine years.

A deal would make sense, in theory. The two companies have existing partnerships, as well as complementary drugs and research programs, as UBS analysts point out. What's more, AstraZeneca is a leader in oncology and Daiichi would add some extra scale in this area, one that large pharma groups are falling over themselves to expand in.

The difficulty is that a transaction would be expensive. It would also require equity to finance, even though AstraZeneca has a market capitalization of 57 billion pounds ($73 billion). Daiichi's stock has been volatile. The company's market value has averaged about $16 billion over the past six months. Add a takeover premium and assumed net debt, and the take-out price would top $20 billion.

Hard Catch
Shares in drugmaker Daiichi Sankyo have lagged the index despite occasional sharp rallies
Source: Bloomberg

At that level, AstraZeneca would need to find considerable synergies to generate adequate returns. Daiichi's operating profit is forecast to fall to about $900 million in 2019, according to data compiled by Bloomberg. 

The sheer size looks a problem, too. AstraZeneca's net debt is expected to hit $12.3 billion at the year-end, nearly twice this year's forecast Ebitda. As UBS says, gearing up for a full deal looks challenging. But the moment when AstraZeneca could comfortably sell new stock seems to have passed. The shares are well down from their 12-month high following recent trial disappointments.

The Moment Has Passed
AstraZeneca would find it harder to raise equity now given July's disappointing trial data
Source: Bloomberg

Moreover, there's a problem with mixed messages. AstraZeneca is investing heavily in R&D. This has put pressure on its dividend. The group recently teamed up with Merck & Co. to develop its own pipeline of drugs. Shareholders could reasonably question why they should fund acquisitions when the company is at the same time bringing in outsiders to help it exploit its own pipeline.

Astrazeneca can dream of being be a bidder. For now, still looks a more likely M&A target.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net