Is AstraZeneca Really Worth $100 Billion?

Pfizer (NYSE: PFE  ) has reportedly made two bids to acquire drug giant AstraZeneca (NYSE: AZN  ) in what could become the biggest drug merger of all time.

The deal could eclipse $100 billion in value and would likely consist of both cash and Pfizer stock given that Pfizer offered $23 billion in cash overall and 1.758 Pfizer shares for each AstraZeneca share back in January.

Since Pfizer may be ready to make another offer, let's take a closer look at why it's so interested in buying AstraZeneca.

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Strength in diabetes
No disease captures as much drug spending as diabetes, and that spending is growing, not shrinking. According to Express Scripts, spending on diabetes medication in the U.S. alone jumped 14% last year, and is expected to grow by 11% this year, and another 12% next year.

That growth is behind AstraZeneca's decision to acquire the half of its diabetes partnership it didn't own from Bristol-Myers in December.

AstraZeneca agreed to pay Bristol as much as $4.1 billion -- depending on sales milestones -- to gain 100% control over diabetes drugs with more than $1.2 billion in annualized sales. That acquisition made Astra the fifth largest seller of diabetes drugs globally.

Among the drugs AstraZeneca now controls are Byetta and Bydureon, two GLP-1 drugs with total sales of roughly $160 million during the first quarter.

In addition to those two drugs, AstraZeneca also markets Onglyza, a DPP-4 drug, and SGLT-2 inhibitor Forxiga, which won FDA approval in January.

Sales of Onglyza totaled $162 million in the first quarter, and while AstraZeneca didn't break out Forxiga sales for the first quarter, analysts think it could eventually achieve peak annual sales north of $1 billion.

Advancing treatment
Given the global population of diabetics is expected to climb from 380 million in 2013 to nearly 600 million by 2035, drugmakers are racing to advance new therapies to market.

Demand for new, better therapies has already created a slate of top-selling blockbusters. The biggest of which is Sanofi's Lantus, which commands 7% market share and had $7.5 billion in sales last year.

In addition to Sanofi, Novo Nordisk  (NYSE: NVO  ) and Eli Lilly (NYSE: LLY  ) are two of the globe's biggest sellers of diabetes medication.

Novo, the globe's biggest sellers of diabetes drugs, markets Novolog, which has more than 40% market share among fast-acting insulin. And Lilly, the third largest seller of diabetes drugs, markets Humalog, another fast-acting insulin with sales of $2.6 billion last year. 

All three are hard at work developing next-generation treatments, too. Sanofi is working on a Lantus successor, U300, that may improve night time glucose levels. Novo's Victoza is a GLP-1 drug competing against AstraZeneca's Bydureon and Byetta, with sales of more than $300 million a quarter. And Eli Lilly hopes to win FDA approval for its once-a-week GLP-1 drug dulaglutide based on late-stage studies showing it works as well as once-daily Victoza.

Johnson & Johnson has also jumped into the market with Invokana, an SGLT-2 inhibiting drug that improves how the kidney regulates glucose levels.

Invokana was the first of the SGLT-2 drugs to win FDA approval, and while Invokana sales aren't broken out individually by Johnson, sales of Johnson's "other" drug category, which includes Invokana, grew 15% year over year to nearly $300 million in the first quarter.

Why would AstraZeneca be for sale?
AstraZeneca is taking a heavy hit from the patent cliff. The expiration of top-selling blockbuster drug Nexium this year puts $2 billion in U.S. sales at risk, and AstraZeneca's $6 billion a year cholesterol drug Crestor loses protection in 2016.

AstraZeneca needs to cut costs to offset the impact of these patent losses; however, it also has 11 expensive phase 3 trials under way, and 27 more phase 2 trials ongoing.

While those trials offer opportunity for AstraZeneca to replace some of the sales lost when Nexium and Crestor face off against generics, they'll require significant investment over the next few years. As a result, AstraZeneca may find in Pfizer a deep-pocketed suitor able to advance these compounds at a time when it isn't expecting to see its sales return to 2013 levels until 2017.

While AstraZeneca's diabetes franchise would fill a nice hole in Pfizer's product line, the majority of its pipeline is focused on other indications, including cancer and autoimmune disease, which are also attractive markets for Pfizer.

Among the most promising drugs in AstraZeneca's pipeline are olaparib and brodalumab. Olaparib is an ovarian cancer treatment targeting patients with a mutation to the BRCA gene. The company could win EU approval for the drug this year, and the FDA accepted the company's application for priority review last quarter, setting a decision date for October 3, 2014. 

Brodalumab, which is being co-developed with Amgen, is in phase 3 trials for psoriasis, a multibillion market affecting 125 million people worldwide. The indication has been a major source of revenue for Amgen's blockbuster drug Enbrel, and Astra hopes to file brodalumab for FDA approval in 2015.

Fool-worthy final thoughts
Drugmakers' interest in diabetes isn't misplaced. It's the most significant market for health care spending globally. About 70 million diabetics live in developed countries, and nearly 2 million people are diagnosed with the disease in the U.S. each year.

By acquiring AstraZeneca, Pfizer would catapult itself into the top five makers of diabetes therapies worldwide. Additionally, the deal would give Pfizer a stable of potentially powerful oncology compounds and a pipeline chock-full of development candidates.

Importantly, since AstraZeneca is a cost-heavy company -- it's SG&A as a percentage of sales is 10% higher than Pfizer's -- significant profit-friendly cost-cutting synergies could be realized by combining the two and eliminating overlapping expenses. That could go a long way toward justifying AstraZeneca's high price tag. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2014, at 9:30 PM, drugstock2 wrote:

    AZN is where capital goes to die. PFE should take $100 billion and purchase a basket of stock to track S&P 500. Collect the dividends, let the capital appreciate. Lend shares to short sellers and play with options. I am sure the return will be greater than investing in AZN.

    The diabetes franchise and got buy buying a few small biotech for a lot less.

  • Report this Comment On April 29, 2014, at 9:34 PM, FrankoJames wrote:

    The minds compiled between those two companies are priceless.

  • Report this Comment On April 29, 2014, at 9:38 PM, FrankoJames wrote:

    AZN with MEDI, WOW

  • Report this Comment On April 30, 2014, at 6:34 PM, SteinwayB731 wrote:

    " . . .significant profit-friendly cost-cutting synergies could be realized by combining the two and eliminating overlapping expenses."

    Translation: more people in pharmaceutical research and development lose their jobs.

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