It's only Tuesday and this has already been an exciting week in the health-care sector. I'm speaking of the news this weekend that pharma giant Pfizer (PFE +1.38%) reportedly considered making a $101 billion bid for U.K.-based rival AstraZeneca (AZN +0.00%), a 27% premium to Friday's closing price.
Although any prospect of a deal has gone dormant, investors throughout the sector are abuzz at the idea that a new wave of consolidation or collaboration may be needed to help counteract the patent cliff -- the shorthand term for a large number of branded drugs losing their patent exclusivity over just a few years. While great news for generic drug producers, this scenario could be a nightmare for branded drugmakers such as AstraZeneca.
Yesterday I examined whether the combination of Pfizer and AstraZeneca would make logical sense, determining that each companies does indeed have what the other needs, but that the price Pfizer is offering may already be too steep.
Source: AstraZeneca.
The one thing AstraZeneca must do
Today, rather than speculate which companies might step up to the plate to purchase AstraZeneca, or guess what price might cause AstraZeneca to leap into a buyer's arms, I'm going to discuss the one thing it should be doing to improve shareholder value: go on the offensive.
We don't often think of Big Pharma as an aggressor. In fact, my personal opinion has traditionally been that Big Pharma is an incubator of drug growth for smaller biotech stocks and a developer of dozens of in-house therapies.
However, this strategy isn't working for AstraZeneca. Yes, the company has an extensive development pipeline comparable with some of pharmaceutical sector's largest companies. But it lacks that immediate impact needed to offset the loss of patented therapies like Seroquel.
AstraZeneca also hasn't been collaborating much, at least in my opinion. The deals we are seeing have involved partnering with large peers such as Merck and Bristol-Myers Squibb. For example, Merck and AstraZeneca announced in September a licensing deal for oral WEE1 kinase inhibitor MK-1775. In December, AstraZeneca announced a major deal to acquire the full stake of its shared diabetes pipeline from Bristol-Myers Squibb for $2.7 billion plus up to $1.4 billion in milestones and royalties. Overall, though, AstraZeneca's pipeline, especially in oncology, is relatively young and lacks a truly exciting handful of candidates needed to step forward and counteract its patent exclusivity losses.
In my opinion, the solution is pretty simple for AstraZeneca: get aggressive and buy growth.
Source: AstraZeneca.
How AstraZeneca could get aggressive
AstraZeneca's pipeline is years away from delivering high growth, but there are a handful of high-growth biopharmaceutical companies possibly waiting to be bought for the right price. Here are a few that AstraZeneca could give serious consideration to purchasing in order to boost its bottom line:
- Jazz Pharmaceuticals (JAZZ +2.61%): Jazz isn't particularly cheap after experiencing strong growth from narcolepsy drug Xyrem over the past couple of years, but it could give AstraZeneca a nice boost with its growing oncology portfolio, especially orphan drug Erwinaze/Erwinase which treats acute lymphoblastic leukemia in patients who have developed certain allergies to other existing therapies. Jazz is set to cross the $1 billion revenue threshold this year and could earn more than $10 in earnings per share by 2015. With Xyrem protected by patents through 2019 this is a safe bet on cash flow. Jazz is also headquartered in Ireland, which has some of the lowest corporate taxes in the world, giving AstraZeneca the potential to reduce its tax liability through the acquisition.
- Cubist Pharmaceuticals (CBST +0.00%): Another of AstraZeneca's primary areas of focus is infectious diseases ranging from influenza to complicated skin and skin structure infections, or cSSSI. Acquiring Cubist would make sense given the company's focus on infectious, predominantly hospital-borne illnesses, as well as the fact that AstraZeneca and Cubist already have a licensing agreement on FDA-approved Cubicin for cSSSI. Wall Street's expects Cubist to see revenue nearly double through 2017, with EPS climbing from breakeven to more than $6 per share. This highly focused mid cap could be a smart buy for AstraZeneca.
- NPS Pharmaceuticals (NASDAQ: NPSP): I can't emphasize enough how important orphan drug developers could become to Big Pharma given their well-protected, specialized, and high-priced therapies. NPS has Gattex, a short bowel syndrome injection approved by the FDA, and may be a short time away from putting its hypoparathyroidism drug Natpara on the market as well. Wall Street estimates have NPS bumping its head up against $1 billion in annual revenue as early as 2018, with the company expected to be modestly profitable this year. With AstraZeneca's backing NPS could advance its orphan therapy portfolio even faster.
Of course, keep in mind that these ideas are pure conjecture on my part. AstraZeneca hasn't given any indication that it plans to acquire any other company, nor have there even been any rumors of deals in the works. However, I believe the case can be made that with its share buyback program on hold and the company trimming costs where it can, it needs to do something bold if it hopes to grow its top line and provide shareholders with a chance at sustainable capital appreciation.
AstraZeneca today holds $9.3 billion in cash and a manageable debt-to-equity ratio of 44.6%; it will likely net in the neighborhood of $5 billion-$6 billion in free cash in 2014. This should give it the ability to make a purchase in the neighborhood of $5 billion to $15 billion, which could make a big impact on AstraZeneca's long-term outlook and for shareholders.
It's certainly food for thought for existing and prospective AstraZeneca shareholders.
