It seems like open season on biotech companies. In recent months, Pfizer (NYSE: PFE) and Merck (NYSE: MRK) have snapped up smaller biotech players. Now AstraZeneca (NYSE: AZN) appears to have outdone its fellow pharmaceutical giants with an even bigger deal. It will pay $1.07 billion for monoclonal antibody developer Cambridge Antibody Technology (Nasdaq: CATG). Unfortunately for AstraZeneca, bigger isn't always better.
AstraZeneca's offer works out to be about $24.98 per share, about a 67% premium to where Cambridge's shares were trading on Friday. Since AstraZeneca already owns 20% of its pending purchase, the deal suggests an overall value for Cambridge Antibody of $1.33 billion -- a pretty steep 14 times sales. Cambridge Antibody has yet to report a profit, although its losses have shrunk the last two years.
Admittedly, Cambridge Antibody has caught the attention of the drug world, with a collaboration list that reads like a who's-who of the pharmaceutical and biotech industries. In addition to a deal with AstraZeneca, it has inked agreements with Abbott Laboratories (NYSE: ABT), Wyeth (NYSE: WYE), Pfizer, Merck, Amgen (Nasdaq: AMGN), Genzyme (Nasdaq: GENZ), and Human Genome Sciences.
Still, only one of these pacts has yielded a marketed drug. Cambridge Antibody's alliance with Abbott resulted in Humira, a rheumatoid arthritis treatment that has become a blockbuster with $1.4 billion in sales last year. But since the biotech company was the alliance's junior partner, its take from this gargantuan amount is pretty small -- roughly $37.6 million last year. Other partners have drugs in late-stage trials, but even if these drugs make it to the market, based on the Abbott deal, Cambridge Antibody's gain won't likely be huge.
As for its own pipeline, last year Cambridge Antibody terminated development on its most advanced candidate, a medicine designed to reduce scarring associated with glaucoma surgery, after it failed to show efficacy in two phase 3 trials. The drug next in line, a candidate to treat certain types of leukemia, is currently in a small phase 2 trial.
It seems AstraZeneca didn't want to be left behind as its rivals bought up biotech technology -- but in its haste, it may be paying a steep price for what it's getting.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
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