3 Pharmaceutical Buyout Targets to Consider in 2012
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Pharmaceutical companies that enjoy monopoly pricing from patented drugs will one day face generic competition and lower profit margins. In 2012 alone, drugs accounting for $63 billion in revenues are expected to lose patent protection, of which $33 billion in sales is forecast to be lost to generic competition and lower prices, according to EvaluatePharma.com.
Giant pharmaceutical companies have several ways to cope with this foreseeable loss of revenues:
1) Lobby governments to extend patent protection. Big pharma has big bucks, and its lobby could attempt to extend patent protection beyond its most recent extension under the Hatch-Watchman Act. In general voters should hate the idea of inflating healthcare and legal costs further in the US, but politicians and lobbyists will likely find ways of promoting such a government-backed handout to the public. (Instead, there should be streamlining reforms to FDA testing, which would benefit everyone. Unfortunately, this requires thought and would appear reckless to the public.)
2) Cut costs. This is achieved mostly by outsourcing production and firing research & development employees.
3) Merge or acquire a firm with better revenue prospects. Large pharmaceutical companies facing patent cliffs and weak drug development pipelines could acquire smaller companies with rosier revenue forecasts.
Unless you are a lobbyist, future M&A transactions are the most fruitful way to profit from big pharma blues. Pharmaceutical speculators who wish to play this trend should take positions in potential takeover targets before a merger is announced while avoiding firms that might be tempted to purchase other firms. This strategy would attempt to benefit from high takeover prices for targets while avoiding price drops from the acquiring firms.
Over the next few years Astrazeneca (NYSE: AZN) and Eli Lilly & Co. (NYSE: LLY) might consider buying other firms to buttress their revenues. According to EvaluatePharma.com AZN is projected to see an average annual 3% decline in prescription sales through 2016 while LLY’s prescription sales are expected to decline 4% on average over the same period.
Which firms might be targets? Theravance, Inc. (NASDAQ: THRX) has a market capitalization of $1.53 billion yet its Relovair product has an estimated net present value of $4.2 billion, making it an interesting acquisition candidate. Anthera Pharmaceuticals, Inc. (NASDAQ: ANTH) also trades below the net present value of one of its drug candidates. ANTH has a market capitalization of $286 million yet its Varespladib (A-002) product has an estimated net present value of $2.2 billion. Incyte Corp. (NASDAQ: INCY) is almost as attractive. It has a market capitalization of $2.23 billion yet its Ruxolitinib (INC424) product has an estimated net present value of $2.5 billion, making it an interesting acquisition candidate. At these prices, acquiring firms would be able to buy the rest of each firms’ assets for free.
Of course, corporate matchmaking is very, very hard to predict. Investors should check the value proposition of each candidate and determine if they would be willing to sell. Moreover, acquiring companies would need to see the value of these firms themselves.
The Motley Fool owns shares of AstraZeneca plc (ADR). IUMFool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
