Long rumored to have eyed Forest Laboratories as a potential acquistion, AstraZeneca allegedly gained board approval for a $15 billion cash offer, secured advisors and started talks with Forest.
In light of Forest's multiple restructuring and cost-cutting measures, however, the price may stall talks as Forest stock hit an eight-year high this week, riding a 20% increase since early October.
Forest's efforts included a $1 billion debt offering to fund a $400 share buyback and $600 million in purchases of drugs, among those, a $240 million offer for Merck's (NYSE:MRK) schizophrenia drug Saphris. The deal comes with payouts for sales milestones and coincides with Merck's own cost-cutting measures, through restructuring and global plant shutdowns.
The Saphris purchase may help overcome losses from the patent expiry of Forest's blockbuster Lexapro last year. However, Forest has made clear its intention to still get its own schizophrenia therapy cariprazine to market.
Forest also announced $500 million of cost savings, which included a 9% reduction in R&D work force. Forest CEO Brett Saunders has made statements of his intent to reduce R&D spending from the company's current 30% to the industry average of 15%, a smart move in light of a recent Deloitte and Reuters study showing return on R&D spending dropping nearly 50% since 2010.
Neither company would comment on the possible buyout, although AstraZeneca CEO Pascal Soriot has made known his interest in acquisitions. He began his term as CEO last year freezing the British pharmaceutical's share buyback program to free up funds for acquisitions.
AstraZeneca has several treatments losing patent protections, and Forest's pipeline for neurology, cardiology and respiratory treatments is highly attractive to AstraZeneca. AstraZeneca stands to lose U.S. patent protection on drugs accounting for more than 20% of sales by 2015 and up to nearly 33% of sales by 2019.
The bottom line
With a $15 billion pricetag and escalating share value, however, Forest may have priced itself out of reach. Analysts estimate AstraZeneca could safely spend upwards $20 billion on acquisitions , but there are smaller deals in its scope such as buying out Bristol-Myers Squibb (NYSE:BMY) from a joint diabetes venture for $4 billion to $6 billion.
The timing is questionable for Forest's significant efforts to raise share value. Either Forest is interested in a buyout and positioning for a steeper price that it thinks AstraZeneca can afford, or it is looking to remain independent and intentionally pricing itself out of reach.
Quite possibly the moves are simply political. Forest CEO Saunders is only a couple months into his new job and well-known investor Carl Icahn has had previous fights with former CEO Howard Solomon on taking a more activist stance in boosting stock price.
Buyout or not, Forest is clearly on the rise -- the question is if AstraZeneca will be the one to ride the trajectory in the future.
Fool contributor Amy Ho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.