PSA Day 2: Buying into Biologics

AstraZeneca's $15.6 billion acquisition of MedImmune may well go down as the deal of the year. Though it has been described as overly expensive, David Mott, MedImmune's CEO who remains at the helm of the "operationally independent but strategically aligned" biologics business, begs to differ. Think of it this way, he suggested this morning at our Pharmaceutical Strategic Alliances conference: AZ paid 20% of their market cap to secure 25% of its pipeline going forward, a target for AZ's biologics output.

Still, if AZ investors had sticker shock, well, it was a seller's market. Still is. "Fully built biologics capabilities are rare," says Mott. Acquiring MedImmune gave AZ the whole biologics package; it was too late for the Big Pharma to build those capabilities through collaboration.

Building biologics expertise and capabilities piecemeal, says Mott, will be a long, slow and high-risk proposition, thanks in part to the dearth of biologics industry talent in key areas like regulatory affairs.

To get the most out of MedImmune, AZ will have to keep the group at arms length, while at the same time fostering a sort of collaborative independence in R&D as well as sales and marketing between the Big Pharma's traditional small molecule business and its biologics business--which (Cambridge Antibody Technology included) is being transferred in practice if not in geographical terms, to MedImmune.

For example, "juxtaposing the biologics commercial business with a traditional pharma primary care commercial business will help us take the best of both worlds to create a new commercial model" with a lower cost base--something in line with, instead of twice as big, as R&D costs.

Mott noted that the biggest challenge arising from the integration of MedImmune has been subsuming CAT into the organization. "CAT was in a difficult position" after AZ bought MedImmune, having been sidelined only a year after it was itself acquired by AZ to become its biologics arm, explained Mott. Becoming part of MedImmune "was not the vision that CAT had for itself." That said, "what we can do together is actually quite persuasive, and it's striking how non-overlapping" the companies' technologies and strengths really are.

Beyond bringing CAT into the MedImmune fold, the biotech is taking the lead in AZ's venture activities through its own MedImmune Ventures business, as well as ownership of AZ's existing large molecule collaborations and programs such as those with Silence Therapeutics in RNAi and Abgenix in antibody development.

We're taking a look at the state of the industry's biologics efforts in the next IN VIVO.

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The Most Important Deal of the Last 12 Months

In preparation for our Pharmaceutical Strategic Alliances meeting in September, we decided to send the same question to 35 of our smartest friends in the business: what deal signed in the last 12 months said the most about the drug industry’s current situation?

The answer (caveat: responses are still coming in) was AstraZeneca’s acquisition of MedImmune.

We suppose the choice shouldn’t have been surprising. At $15.6 billion in cash, it was arguably the biggest biotech acquisition ever. (Amgen’s 2001 buyout of Immunex looked bigger, but what was worth $17.9 billion in a combination of cash and stock at the deal’s announcement had, thanks to the dip in Amgen’s shares, dropped below AZ/MedImmune all-cash price by the time Amgen/Immunex closed in 2002.) And you can read what IN VIVO said about AZ/MedImmune at the time by clicking here and scrolling down to the sidebar (“AZ Spends Big on MedImmune”).

At the PSA meeting, we’ll interview in front of the assembly the man who engineered this remarkable deal—MedImmune’s CEO David Mott, who is now going to run AZ’s combined biotech efforts. And we’ll ask him what appetites at Big Pharma drove that astonishing price —since the auction he ran allowed him peeks at a variety of companies and their challenges.

By and large, our polltakers (a mix of heads of Big Pharma R&D and business development organizations, a few biotech CEOs, a couple of bankers, and a handful of VCs) figure the deal’s real driver was product panic.

One typical comment came from a Big Pharma R&D chief: “The deal shows the magnitude of the desperation of the pharmaceutical industry, and how badly things are going right now.” Or from a Big Pharma’s head of business development: the deal’s price “illustrates the general paucity of pipelines in many major companies. Over time I believe this is a value destruction deal and if replicated too often will lead to trouble.”

But the price also reflected, said our respondents, the capability AZ badly wants – large molecules and specifically antibodies. Relatively representative was the comment of one biotech CEO (whose company is pursuing small molecules). The price, he said, represented the fact that “biologics are likely to represent 30% of any Big Pharma’s future product portfolio and that they have to get in the game now, not via this or that product but, rather, by acquiring a soups-to-nuts biologics capability.”

Later this week, we’ll detail some of the other deals selected by our respondents -- every single one analyzed at the PSA meeting by the executive responsible for it.

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MedImmune Investors Get Paid

In a clearly opportunistic deal AstraZeneca is buying MedImmune for a whopping $15.2 billion ($58 per share). AZ says the acquisition will add significantly to its pipeline and complement the biologics discovery expertise within its Cambridge Antibody Technology unit with development and manufacturing skills and infrastructure. MedImmune also brings AZ for the first time into the vaccines space, an increasingly popular market for Big Pharma.

The price is a 53% premium to MEDI's closing price the day before it announced it was for sale, and 21% above its Friday close. But AZ investors hopeful that for all that cash the Big Pharma would boost its ailing late-stage pipeline (where it has suffered a handful of setbacks in the past few months) aren't likely to be pleased by the deal. MEDI CEO David Mott noted on a call today with AZ analysts that MEDI anticipates having only three to five projects in pivotal trials in the 2009-2010 timeframe. Most of MEDI's $1.3 billion annual revenue comes from sales of the respiratory drug Synagis ($1.1 billion in 2006).

The acquisition was first reported over the weekend by the WSJ ($), which noted their were four pharmaceutical bidders for MedImmune, including AZ and Eli Lilly & Co. The deal is the latest sign of biotechs increased leverage over product-hungry Big Pharma, and will further the agendas of biotech shareholders that argue for immediate satisfaction via M&A.

AZ will finance the cash deal with a variety of debt vehicles, according to AZ CFO Jon Symonds. The refinancing plan hasn't been put in place yet, he says, but "clearly we'll want to preserve our financial capacity to take further opportunities as they come. This is not the end of our externalization ambitions."

The company's next move is anyone's guess. After all, AZ went after MedImmune despite its protestations that it wasn't in the market for such a deal, suggesting Big Pharma in some cases doesn't know what it wants until it's presented with an opportunity--and if biotech investors get their way, many more such opportunities will come AZ and others' way. Just how does the acquisition of MedImmune jive with CEO David Brennan's comments during an extensive and exclusive interview with IN VIVO last month:

Q: Are larger bolt-on acquisitions out of the question?

I never say never. But bigger acquisitions are not really on the radar screen at the moment. We're focused on getting more quality products into the portfolio. Large-company transactions are complicated, painful, and take a lot of effort.

Good luck!

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Strategic Alternatives: MedImmune Edition

Medimmune is exploring strategic alternatives, including a possible sale of the company, with the help of bankers Goldman Sachs. Investors apparently like the idea: MEDI shares (already up 20% in the past couple months) are up more than 12% this morning and knocking against five-year highs, and the company's valuation has broken through the $10 billion barrier.

And why wouldn't they? All signs point to sweet takeout valuations by pharma desperate to beef up pipelines. Schering's takeover of Organon is in the same ballpark, valuation wise, and while Medimmune can't boast five products in Phase III studies like Organon, it's pipeline is arguably broader and deeper. Plus Medimmune operates in vaccines and biologics, two sought-after capabilities in Big Pharma these days, and is growing at a nice clip: on Monday the company announced that it expected first quarter earnings to triple over 2006.

MedImmune has suggested it is interest from certain pharmaceutical companies and dissatisfaction on the part of certain shareholders (i'm looking at you, Carl Icahn) that led to the move.

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