On Friday, we examined which characteristics improve the odds of a successful pharmaceutical acquisition. With so many mid-cap and large-cap pharmas like Endo Pharmaceuticals
Because of the relatively short (but hugely profitable) marketing life of its products, the pharmaceutical industry depends on the abilities of its research and development teams to bring new drugs onto the market. If a drugmaker can't successfully shepherd new molecules into the clinical trial process with its in-house R&D team, its can only otherwise grow its pipeline through acquisitions.
As we discussed in greater depth on Friday, an Emory University study found four main characteristics that correlate to pharmaceutical deals that subsequently boost the acquirer's share price:
- The buyer has worked closely with its purchase in the past and knows its operations well.
- The buyer and purchase pursue complementary lines of work.
- The deal involves equity, instead of cash.
- The purchaser is not desperate to pad out its pipeline.
Let's use these criteria to evaluate several recent blockbuster acquisitions.
AstraZeneca and MedImmune
While it will be years before any definitive statements can be made about the deal, the MedImmune buyout doesn't bode well by the standards above. The companies had no prior relationships before the deal, and the nearly $16 billion offer was an all-cash deal (for MedImmune shareholders).
After severalflameouts with late-stage drug candidates it had partnered on over the past 12 months, AstraZeneca was also getting desperate for mid- and late-stage pipeline products to spur future sales growth, with only four new chemical entities in phase 3 testing at the time.
In the acquisition's favor, AstraZeneca does market blockbuster asthma treatment Symbicort, so it's familiar with both MedImmune's key research focus on respiratory conditions, and with its lead drug Synagis. On balance, though, the other factors suggest this deal won't help AstraZeneca's shares.
Shire and New River Pharmaceuticals
Earlier in the year, I was shocked to see Shire Pharmaceuticals
Nonetheless, this deal seems promising, based on our four factors. Shire and New River previously worked together on New River's lead drug Vyvanse in 2005. New River's pipeline was relatively bare, so gaining access to the full revenue stream from Vyvanse was the main reason for the acquisition, as Shire pointed out when it made the deal.
Vyvanse is a treatment for attention-deficit hyperactivity disorder (ADHD). Shire had already done its due diligence on the main component of the buyout, and it was well aware of the therapeutic area that it treats. Integrating the drug into its existing ADHD sales force should be no problem.
Since Vyvanse just entered the market in late June, it's too soon to say how well sales of the drug will fare, or whether Shire overpaid for New River. According to the journal article's criteria, though, this acquisition is most likely correlated with future stock success.
Gilead and Myogen
Last year, Gilead Sciences
This acquisition has already started bearing fruit for Gilead with the June approval of Letairis. But if Encysive Pharmaceuticals
The all-cash deal was a bad sign to start with, and Myogen's research focus on cardiovascular indications also fell outside of Gilead's core competency in treating HIV/AIDS. In addition, the drugmakers had no prior experience working with each other.
Even though this deal looks less than promising, shares of Gilead are so undervalued right now that it will still likely outperform the market going forward. Investors should put the company on notice for any future deals, though. According to one journal article, drugmakers that made at least two acquisitions in the previous three years had their shares gain 3% less than their non-acquisition-happy pharma peers.
Deal or no deal
Even after a few years' time lends greater insight into these acquisitions' success, it will still be hard to say whether they were a better or worse use of a drugmaker's cash than an equivalent share buyback or dividend. Nonetheless, investors can use the above characteristics to help them evaluate whether a pharma is putting its money or equity to good use.
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