We haven’t spent much time over here talking about the “buckets of cash” scandal that’s been keeping the pharma-focused bloggers very busy, and even less comment on the apparently expensive and rather bizarre purchase of MedImmune. Both concerning AstraZeneca. But The Industry Veteran has been wondering around on the grassy knoll and has come up with a very interesting explanation that links the two:
I spent a good part of the past two weeks in the unaccustomed position of defending AstraZeneca. Equity analysts and others in the pharmaceutical industry seemed astonished by the high price the company paid (a 52 P/E ratio) to acquire MedImmune. Their basic criticism amounts to a complaint that AZ acquired neither an auspicious, late-stage pipeline or a significant cash flow. Both observations are correct but AZ gained other benefits for this steep price. What AZ bought was a place for themselves in two businesses when they acquired MedImmune. Companies typically have to overpay when they want to get into a new game. Ten years ago Abbott paid 40 times earnings when they bought MediSense to get into the blood glucose monitoring business. More recently Novartis paid through the nose to belly up to the vaccine business bar. A few weeks ago Schering-Plough overpaid to buy Organon but Fred Hassan gained stronger positions for himself in the women’s health and the dermatology businesses. Given the current trough in Pharma’s new product development, it’s simply a fact of life that anyone seeking to consummate a merger or acquisition must be prepared to overpay. Fifteen billion dollars for MedImmune is certainly no more outrageous than paying a 42-year old pitcher $15 million for half a season.AZ placed a toe in the water of the vaccine business, something that does not resemble Pharma’s traditional goldmine because a high proportion of vaccine customers are public agencies. Nevertheless, the vaccine business is poised to grow, and if it receives a boost from a pandemic flu epidemic, it will grow enormously. It will also grow substantially if someone makes good on the effort to develop an oncology vaccine or immunizations for the many viral infections that threaten the length and quality of life.In buying MedImmune AZ also acquired capabilities for entering the biologicals business. At this point the multi-billion dollar products of companies such as Amgen and Genentech do not face the precipitous revenue losses that occur when Pharma companies lose patent protection on their products. This is because most regulatory agencies have not developed guidelines for determining acceptable thresholds to approve generic versions of biological products. Congressional waterboys for the biotechs, such as Sen. Ted Kennedy, want makers of generic biologicals to conduct the same sort of clinical trials for their products as the original developers of the branded biologicals. Faced with such high development costs, the generic model of low cost equivalents becomes unsustainable. Nevertheless, despite the disingenuous concerns of Sen. Kennedy and others, Congressmen wise to Pharma such as Henry Waxman and Bernie Sanders will eventually succeed in creating some form of "bio similar" legislation. The country can only tolerate so many stories about people who died because they were unable to make even the co-payments on biological medications costing between $40,000 and $200,000 per year. At that point there will be a major demand for an entire industry of generic biologicals.During the two weeks I was defending AstraZeneca’s purchase, CEO David Brennan and John Patterson, the VP for Clinical Development, did their best to undermine my claims about their wise purchase.