Pharmaceutical and biotech mergers and acquisitions (M&A) is on track to hand us the best year for non-mega merger deals since 2010 - which is delivering juicy profits for anyone investing in drug stocks.
On Monday, Dublin-based pharmaceutical firm Shire (Nasdaq ADR: SHPG) announced that it will buy Pennsylvania-based ViroPharma (Nasdaq: VPHM) for $4.2 billion in cash. The $50 per share purchase price is a 27% premium to Viropharma's Friday close and a 64% premium to the price when sale rumors first emerged this summer.
Shire's acquisition is "strategically very sound" despite the "eye-watering" multiple, Panmure Gordon analyst Savvas Neophytou told The Wall Street Journal. Pharmaceutical companies typically pay between five and 6.5 times sales, he said. Shire is paying nine times estimated 2013 sales for ViroPharma.
But Shire gets quite a bit for its $4.2 billion...
ViroPharma's main product is Cinryze, a treatment for chronic hereditary angioedema. Cinryze complements another Shire product, Firazyr, which treats acute attacks of the same disease. The acquisition will allow Shire to capitalize on its highly trained Firazyr sales force.
The purchase will bring Shire's rare drug portfolio to 40% of total sales, easing its dependence on attention deficit hyperactivity disorder medications Vyvanse and Adderall.
In addition, Shire expects the acquisition to result in $150 million in cost savings by 2015.
The deal, Shire's third this year, is just the latest in a wave of mergers and acquisitions driving up drug companies' share prices. The Dow Jones U.S. Pharmaceutical Index is around $400, up from $330 in December.
Deal value for the first half of 2013 was $29 billion with 72 transactions, according to industry analyst EvaluatePharma's 2013 half-year review.
Add Amgen Inc.'s (Nasdaq: AMGN) August $10.4 billion offer for Onyx Pharmaceuticals Inc. (Nasdaq: ONXX), Perrigo Co.'s (NYSE: PRGO) July purchase of Elan Corp. (NYSE ADR: ELN) for $8.6 billion, and the Shire deal, and the year-to-date deal value for pharma/biotech M&A hits more than $50 billion.
Most of that value has come from a few large transactions, notably Valeant Pharmaceutical Intl Inc.'s (NYSE: VRX) $8.7 billion acquisition of Bausch + Lomb, and Actavis PLC's (NYSE: ACT) $8.5 billion purchase of Warner Chillcott PLC.
And the acquisitions will continue into 2014.
Why Pharma M&A Is Still HotThere are two very good reasons M&A is so popular right now for pharmaceutical and biotech companies.
First, as Money Morning's Executive Editor Bill Patalon pointed out at the beginning of this year, the economics of the pharmaceutical industry make M&A an essential part of any company's arsenal.
Taking a new compound - the industry's term for a potential candidate drug - all the way to final Food and Drug Administration approval can take more than a decade and cost more than $1 billion. It makes increasingly little sense to Big Pharma to shoulder the time and risk of new drug development when it can buy an existing product or company.
Case in point: UBS AG analyst Guillaume van Renterghem told Bloomberg: "[Shire] is basically saying, 'Our research and development does not give us enough return. Let's shrink it and grow by acquisitions." Van Renterghem estimated that ViroPharma's purchase price was 4.5 times Shire's entire research and development budget.
Second, according to PriceWaterhouseCoopers's analysis of third quarter M&A, the fundamentals for deal making remain strong. These include strong balance sheets and friendly capital markets.
This is good news for investors, as the pharma deals to date have boosted the double-digit returns of these drug stocks...
Drug Stocks: More M&A Profits AheadAmgen paid $125 per share for Onyx, a 6% premium to the previous Friday close. Amgen's own shares rose about 7% following the announcement. That added to a 23% year-to-date gain for AMGN prior to news of the sale.
Perrigo paid $16.50 per share for Elan, 10% higher than the previous Friday close. Actavis paid Warner Chillcott shareholders a 4.5% premium for the company.
Valeant, meanwhile, has been on a general upward trend since acquiring Bausch + Lomb, rising from $75 in late May when the deal was announced to more than $100 at this writing for a 33% gain.
The next takeover targets will be pharma/drug companies that have a corner on some profitable market segments.
For example, Onyx brought Amgen access to the cancer market with Kyprolis, a drug expected to produce about $3 billion in revenue by 2025. Bausch + Lomb brought Valeant access to the desirable ophthalmology market with a well-known brand name. Both Perrigo and Actavis bought access to the low Irish corporate income tax when they made their Irish acquisitions and announced plans to re-incorporate in Ireland.
"It's been a sort of feeding frenzy," Timothy Chiang, an equity analyst at CRT Group told Bloomberg. "I think some companies have just been screening for anything that has an Irish corporate tax structure."
That story suggested Jazz Pharmaceuticals PLC (Nasdaq: JAZZ) and Alkermes PLC (Nasdaq: ALKS) could be targets, as well.
More drug stocks to buy now: One of the big organic and strategic growth opportunities for the pharmaceutical industry is for generic drugs in the emerging markets. Take a look at four ways to capitalize on this trend.
Related Articles
- Bloomberg:
Shire Buys ViroPharma for $4.2 Billion to Add Orphan Drug - The Wall Street Journal:
Shire Buys ViroPharma for $4.2 Billion - Evaluate Pharma:
Half-Year Review 2013 - PriceWaterhouseCoopers:
Life Sciences Deals Insights Quarterly Q3 2013 - Bloomberg:
Jazz Seen Next Target Among Irish Deal Frenzy
