AstraZeneca Serious, 'Not Desperate,' in MedImmune Deal

AstraZeneca has bought MedImmune in an all-cash $15.2 billion deal. And while the larger company's hunger for new products was no surprise, the high price raised plenty of analyst eyebrows--and even some shareholder ire.

With patent expirations coming fast and furious over the next four years, and new products only creeping through the pipeline, another wave of M&As has seemed inevitable to many industry observers. But instead of the stately marriage of giants witnessed during the blockbuster '90s, pharma is now seeing strategic--and, it's hoped, more productive--unions that involve access to specific technologies or compounds.

The MedImmune purchase is AstraZeneca's first venture into the vaccine space--a sign that the market is expanding after risk-averse drug makers scaled back their investments. Five companies now control 80 percent of vax production, according to market research firm Wood Mackenzie, but their expanding bottom lines are attracting competition. A case in point: Sanofi-Aventis--hurt by patent challenges, FDA approval delays, and safety issues (the industry's profit-stealing trifecta)--reported an anemic 2.5 percent growth in its pharmaceuticals division but a far healthier 22.7 percent sales spike in vaccines.

MedImmune has six vaccines in its pipeline, targeting such diverse diseases as pneumonia, avian flu, and Epstein Barr. The Maryland-based pharma already markets Synagis (palivizumab) for an infant respiratory infection and inhaled flu vaccine FluMist. With $1.07 billion in sales, Synagis represented 87 percent of MedImmune's revenue last year, although FluMist scripts have underperformed.

The acquisition also builds on AstraZeneca's foray into biologics, launched last year with its $1.3 billion grab of Cambridge Antibody Technology. "We have taken very decisive action to significantly accelerate...that biologic strategy," said CEO David Brennan. "Strengthening the pipeline has been our highest priority."

The deal adds expertise in infection, oncology, respiratory conditions, and inflammation--creating crossover with therapeutic categories that AstraZeneca is already investing in. The British drug giant previously announced it was changing its R&D strategy, entering more lucrative areas and exiting crowded ones like gastrointestinal and hypertension. MedImmune not only adds 45 R&D projects to AstraZeneca's 118. It also lays the groundwork for further licensing deals in biologics and vaccines, according to John Patterson, who heads development at AstraZeneca. The larger company projects about $500 million in synergies, according to CFO Jon Symonds, who added that MedImmune has an estimated compound growth rate of 12 percent through 2010.

These bright, shining promises sent the price of the deal soaring--to $58 a share, a 21 percent premium to MedImmune's share price and 11 times the biotech's earnings. At AstraZeneca's annual general meeting the day after the deal, shareholders raised their doubts--and voices--about both the price tag and the portfolio fit of the MedImmune merger. According to the Guardian, one man asked whether it was an "act of desperation, when you have failed in our proven therapies"--a reference to four recent late-stage drug failures AstraZeneca has suffered. Defending the deal, board chair Louis Schweitzer said, "This is clearly not an act of desperation. The MedImmune acquisition was considered by the board months ahead of the decision to buy it." Morgan Stanley, according to Reuters, said the high price "puts significant weight on AstraZeneca to deliver on the proposed synergies." CEO Brennan noted in a conference call that he expects the acquisition to be "earnings enhancing" beginning in 2009.

The size of the deal tops Schering-Plough $14.4 billion offer for Organon--a March merger that seems to have kicked off a seasonal spending spree across Big Pharma.