What now for the pharma industry?
With six of the sector's key players about to become three, where does this leave the UK pharma giants?
Pharmaceuticals have outperformed in recent sessions on the back of sector consolidation news, with the past six weeks having been rather busy for a number of leading industry players. As a result of recent developments, six of the sector’s key members are now due to become three. So where does this leave the remainder? Industry analysts tend to agree that we're not about to see another round of mega-mergers, but there are still opportunities out there.
Towards the end of January, US pharma giant Pfizer announced it will acquire peer Wyeth for about US$68 billion, close to a 30% premium to where Wyeth was trading before media reports of the potential acquisition emerged. Given the strong complementary business lines of the two companies and the challenging capital markets, Morningstar.com analyst Damien Conover doesn’t expect another pharmaceutical company to outbid Pfizer—he expects the deal will close as anticipated in the third quarter.
This announcement was just the start of it for 2009: on Monday of this week, another mega pharma merger was announced, with Merck and Schering-Plough combining operations at a cost to Merck of US$41 billion. Conover believes Merck is getting Schering at a good price and thinks the merger should help Merck through challenging patent expirations over the next two years.
And then today, Swiss pharma group Roche Holding confirmed it has come to an agreement with Genentech to buy the 44% of the US biotech company that it does not already own for around US$47 billion. The two groups have been in talks for almost eight months as Genentech repeatedly turned down Roche’s offers but last Friday the Swiss firm upped its bid price to US$93 per share, which proved to be enough to bring its peer’s management to the table. The deal was finally struck at US$95-a-share, Roche announced this morning.
So where does all this action leave the UK pharma groups? Speculation of a mega-merger between AstraZeneca and GlaxoSmithKline has long been a favourite of the traders’ rumour mill in times of boredom. But with industry players already having committed themselves to spending US$156 billion this year it seems that funds—and indeed opportunities—could be limited in the near-term.
With Merck joining Pfizer, Roche and Novartis in having made their move, the prospects of a bid for AstraZeneca in the short-term appear to have receded, but Panmure Gordon analysts believe an offer for the Anglo-Swedish firm could still emerge in the medium-term. Unless, that is, the Merck/Schering-Plough becomes a contested bid.
The most likely counter-bidder would be Johnson & Johnson, Panmure’s analysts wrote in a note to clients yesterday, which has a vested interest in Schering-Plough through immunology drug Remicade. “If J&J counter bids, it would leave Merck as a possible bidder for AstraZeneca,” Panmure said, “but a J&J success may also spur Abbott Laboratories into action, which would bring AstraZeneca into play as it already has a relationship over [cholesterol drug] Crestor.”
Panmure’s initial reaction to the Merck/Schering-Plough deal is that it implies significantly more value for AstraZeneca shares. Applying the transaction multiple of the Merck/Schering-Plough deal to Astra’s shares implies a fair value for the stock of 3,835p, Panmure Gordon calculated yesterday, while the Pfizer/Wyeth transaction multiples point to a fair value of 4,500p. Both figures represent a considerable increase on the UK-listed stock’s closing price Wednesday of 2,249p.
Whether there are any bid developments in the near-, medium-, or long-term, Panmure still sees significant value in the stand-alone business and yesterday reiterated its Buy recommendation and 3,100p per share price target on AstraZeneca.
The general feeling among analysts and market traders alike is that another round of mega-mergers is not on the cards any time soon. Charles Stanley analyst Jeremy Batstone-Carr adheres to this view, although he said today that one cannot rule out vague speculation involving Shire.
“Its attractive portfolio of new products, most of which enjoy orphan indication status and long patent protection, does make it potentially attractive,” Batstone-Carr wrote to investors this morning. “For the present, however, we believe that speculation will prove the limit.” The analyst still thinks Shire’s shares are worth picking up and therefore repeated his Accumulate advice.
In mid-session deals on Thursday, AstraZeneca shares traded 0.9% higher at 2,269p, GlaxoSmithKline added 1.8% to 1,031p, and Shire was 1.0% firmer at 788p.
