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Imagine what it’s like being AstraZeneca boss Sir Pascal Soriot. The company you run is doing well — on track to beat a goal of $80bn of annual sales by 2030. A pipeline of almost 200 drug development projects looks pretty full. Yet something is missing: genuine global heft. Time, perhaps, to do a megadeal.
Why else would AstraZeneca be considering a merger with Bristol Myers Squibb, as the FT reported over the weekend. After all, Soriot doesn’t need to go shopping to plug holes in his own business, let alone attempt one of the biggest drugmaker acquisitions ever.
AstraZeneca shares slipped on Monday, suggesting investors are bemused. On the face of it, buying BMS wouldn’t be great for them. Drug mergers tend to result in companies cutting 8-12 per cent of their combined operating costs, according to analysts at Jefferies. At the higher end, that would bring around $6bn in annual cost savings, worth a lump sum after tax of perhaps $50bn. Paying a 30 per cent premium for the $135bn BMS would chew through $40bn of that.
Nor is BMS, while its share price has improved recently, an obvious trophy asset. The majority of its revenue rests on patents that expire before 2030, according to Barclays. The company trades at 10 times forward earnings, according to S&P Capital IQ, a discount to rivals like Novartis, Roche, Merck and AstraZeneca itself. Investors wiped more than $20bn off the putative buyer’s market value on Monday.
For all that, a deal has some charms. Both companies have large cancer divisions, so might squeeze out extra value from cutting duplicate oncology sales teams. And AstraZeneca could theoretically ditch its UK headquarters and decamp to the US, where it already has a listing, though new Prime Minister Andy Burnham might have strong feelings about losing a big company so early into his leadership.
Seen from Soriot’s perspective, it’s also hard to deny that the world is changing: Big Pharma is turning into Huge Pharma. AstraZeneca is the UK’s second-biggest company by market capitalisation, but is a quarter the size of the $1.1tn Eli Lilly. Johnson & Johnson weighs in at roughly $600bn and AbbVie at $430bn.
Sheer mass helps in Big Pharma, where bigger balance sheets support bigger pipelines and allow for larger bets on drugs that might fail, or might become blockbusters. Eli Lilly is likely to make $48bn in operating cash flow next year, according to Visible Alpha. AstraZeneca and BMS may, between them, muster $35bn.
Some realism is needed: regulators would no doubt squeal about the creation of such a dominant player in oncology. Asset sales would certainly be required. And investors’ lukewarm response could be troublesome if a deal requires their approval. AstraZeneca would have to sketch out the benefits persuasively.
Pharma is a sector where big deals have been proposed and fallen away before, including Pfizer’s failed attempt to buy AstraZeneca back in 2014. Still, Soriot has credit in the bank from getting the UK drugmaker back on track since taking over in 2012. This is an industry built on taking big, bold bets — and views of what constitutes “big” are changing by the minute.
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