ANALYSIS- AstraZeneca pays high price to join vaccines race
By Ben Hirschler, European Pharmaceuticals Correspondent
LONDON, April 23 (Reuters) - AstraZeneca Plc , in dire need of new products to fill its drug pipeline, is paying a high price to boost its stake in biotech medicine and compete for the first time in vaccines. Its planned $15.2 billion acquisition of MedImmune Inc. values the U.S. firm at nearly 11 times expected 2007 sales, or a premium of 53 percent to its share price on April 11, the day before it announced it was up for sale.
In fact, MedImmune's stock price was already inflated by bid talk before then, after stakebuilding by billionaire investor Carl Icahn, and Lehman Brothers said the price paid was double its own estimate of net present value for the group.
AstraZeneca argues it can make the deal cash-earnings enhancing in 2009 by extracting around $500 million of synergies annually, representing around a third of expected 2007 sales, which analysts said looked ambitious.
The high price paid for the maker of flu vaccines and an antibody drug for lung disease in children, once again underlines the hunger of "Big Pharma" for assets discovered in the biotechnology sector.
The problem is particularly acute for AstraZeneca, since the failure of experimental treatments for stroke, diabetes and heart disease leave it heavily reliant on stalwarts such as antiulcerant Nexium and schizophrenia drug Seroquel, both of which face patent challenges.
But drug giants including Pfizer Inc , GlaxoSmithKline Plc , Merck & Co Inc. and Novartis AG have also been buyers of biotech companies.
Ernst & Young said in a report last week the average takeover premium paid in biotech transactions worth more than $500 million had jumped to 60 percent last year -- more than twice the level seen between 2003 and 2005.
FEROCIOUS COMPETITION
In the case of MedImmune, bidding in a auction handled by Goldman Sachs which ended with sealed offers on Sunday, had been "ferociously competitive", AstraZeneca's Chief Financial Officer Jon Symonds told reporters.
Bear Stearns analysts said the lofty price tag meant there was little chance of a counterbid emerging and, overall, the deal should "de-risk" AstraZeneca's business.
Still, investors were wary about the high price being paid, which will shift its balance sheet into permanent debt, although the exact level of gearing depends on future share buybacks.
UBS, which expects the buyback level to fall to $2 billion in 2008 from $4 billion this year, estimated the group would carry about $10 billion of debt.
Other analysts also questioned the lack of detail on where the predicted synergies would come from, and shares in the drugmaker fell 3 percent by mid-session, making the stock the biggest loser in the UK's FTSE 100 index.
Morgan Stanley said the deal "puts significant weight on AstraZeneca to deliver the proposed synergies".
Vaccines have for many years have been viewed as a low-margin, low-growth sector, but technological breakthroughs have brought them back to the forefront of science.
AstraZeneca's development head, John Patterson, said vaccines would complement its existing know-how in conventional small-molecule medicine and large-molecule biotech treatments.
"We won't be the broadest vaccine producer in the world but I think you will see us focusing in on some very key disease targets and having the opportunity to hit those targets with small molecules, large molecules and vaccines," he said.
That focus will centre on infectious diseases, oncology and inflammation, he added.
Vaccines are currently a small slice of the overall drugs market, with estimated global sales of around $12 billion a year, out of a total of more than $600 billion, but Lehman Brothers believes long product life cycles and a better pricing environment make them attractive to big pharma.
Glaxo, Novartis and Pfizer have all completed vaccine acquisitions recently, with a total of nearly $8 billion spent on vaccine M&A since September 2005.
One of the potentially most lucrative new kinds of vaccines are those to prevent women becoming infected with human papillomavirus, or HPV, that can cause cervical cancer.
MedImmune has links to both Glaxo and Merck in this field, since it is entitled to royalties on sales of their rival HPV vaccines Cervarix and Gardasil.