AstraZeneca’s Acquisition of Omthera Pharma Is a Desperate Act

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AstraZeneca (NYSE: AZN) announced the acquisition of Omthera Pharmaceuticals (NASDAQ: OMTH), a company that went public just last month (April 11). Omthera listed a price of $8 per share, and has since struggled to breach that mark until AstraZeneca came up with an offer to acquire the company. Omthera is a specialty drug maker with a keen focus on patients who have high levels of fats, called triglycerides, in their blood.

The acquisition in numbers

On Tuesday, May 28, AstraZeneca announced that it would pay $12.70 per share of Omthera, representing a premium of 87% on Omthera’s shares, as per closing price on Friday, May 24 of $6.77. Following the announcement, shares of Omthera rallied 100% to close at $13.51, $0.81 above the offer price. This might insinuate that AstraZeneca is acquiring the company at a discount of 5.22%, as per Wednesday’s market price of $13.40 (12.53 p.m EDT), but that is not the case. The announcement just drove the stock to the rooftop, and now I fear that anyone buying at the current market price might be making a huge mistake.

When such opportunities occur, they don’t last for long, and many people end up buying when the opportunity is already gone. Nonetheless, AstraZeneca’s valuation of Omthera at $323 million, plus an additional $120 million based on performance, is somewhat ridiculous. Omthera has a cash of $63 million, which would result in an enterprise value of $260 million, albeit with a possibility of an additional $120 million. This means that AstraZeneca could end up making a net payment of $380 million. But, even assuming that the extra $120 million is attached to the rate of return on investment, is AstraZeneca serious by putting a cool $260 million in a company of 14 employees, one which has barely been exposed to the scrutiny of the public eye? Additionally, considering the level of risk attached to the pharma industry, was a small cap debutante the best choice? I do not think so.

Was Amarin too hard to get?

Amarin (NASDAQ: AMRN) would have probably been the best option. Reports suggest that AstraZeneca has been eyeing the lucrative, rapidly growing fish oil market, designed to treat high levels of triglycerides and high-risk patients with cardiovascular disease. Amarin would have been the perfect choice, and even AstraZeneca knows it very well. Amarin has survived the scrutiny of the public eye for several years, since its listing on April 5, 1993.

The company has strong fundamentals, which have helped in keeping the faith. Reports even suggest that Amarin thought it was better placed for the acquisition, only to see an untried Omthera beat it purely on valuation basis. Nonetheless, I believe that Amarin still holds the advantage over the new merger of Omthera and AstraZeneca, as the acquisition was a consequence of desperation. AstraZeneca was desperate to get in the act, as it looks to benefit in the rapidly growing fish oils market. Had it chosen to acquire Amarin, it would have burned close to $1 billion in cash. However, consider the case of Facebook: many would have offered to buy shares of the social network a couple of months after listing, but not six months later.

Probable immediate benefits

There are no current tangible benefits, aside from the launch of Omthera’s Epanova, a drug that has successfully completed two Phase III tests, registering success in lowering test subjects' high triglycerides and, in combination with a statin, HDL cholesterol levels. AstraZeneca CEO, Pascal Soriot, said,

"The number of people with elevated triglyceride levels is rising rapidly across the world, due in part to the increasing prevalence of obesity and diabetes." Soriot added "This is an exciting acquisition that clearly complements our existing portfolio in cardiovascular and metabolic disease, one of our core therapy areas." 

AstraZeneca’s competitors are doing well, but still lag behind

AstraZeneca faces competition from Pfizer (NYSE: PFE), Merck and GlaxoSmithKline (NYSE: GSK). It is the smallest among the quartet with a market cap of $65.44 billion, as compared to Pfizer’s $201.02 billion, the largest, which is followed by Merck at $141.59 billion and GlaxoSmithKline with $126.16 billion worth of market cap, as of the time of this writing.

However, AstraZeneca has one of the best gross margins with 81%, similar to Pfizer, while GlaxoSmithKline and Merck have gross margins of 71% and 65%, respectively. The London-based pharmaceuticals company also holds the best operating margin with 33%, just edging out Pfizer at 32%. GlaxoSmithKline has 28%, while Merck lags further behind with just 21%. Interestingly, all the companies are doing exceptionally well compared to industry averages.

AstraZeneca is still the cheapest stock in terms of P/E ratio with just 11.59 times, well below the industry average of 14.20 times. The other company with P/E below the industry average is Pfizer with 13.60 times, while the rest are quite expensively priced (GlaxoSmithKline at 19.07 times, and Merck 23.93 times).

The bottom line

In general, the Pharmaceuticals industry remains one of the riskiest in the market. The companies operating in this industry expose themselves to high risks with heavy investment in research and development, subject to results, which have to be approved by the Food and Drug Administration (FDA). Nonetheless, positive results often come with enormous upside for the companies. 

AstraZeneca has probably done the right thing by acquiring a nearly-completed project, rather than developing its own from scratch. Omthera's new cardiovascular drug is in its final stages, and the London-based pharma has efficiently hedged its way into the rapidly-growing biotech field. The company could have done much better by acquiring the veteran, Amarin, but nonetheless, Omthera was quite cheap and saved AstraZeneca some cash in achieving the same goal.

Additionally, AstraZeneca is also in the running to be granted approval to develop and distribute Metreleptin for the treatment of lipodystrophy. The pharma giant is continuing its commitment to scientific innovation and global patient care for people impacted by diabetes and related metabolic disorders. The addition of fish oil products into its massive portfolio creates an opening to an interesting industry with a lot of potential. It's no wonder why the company had to move fast with an eye on the positives.

On the other hand, Omthera should brace itself for having ousted Amarin in securing a deal that ensures massive cash backing for future developments as it seeks to expand its fish oils line of products. This is the only way to keep up with the rapidly-developing market for the Omega 3 rich products. Meanwhile, Amarin will have to continue maintaining good performance, as it's never known who could come knocking next.

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Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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