What’s the Big Deal?
In its $1.26 billion acquisition of Ardea Biosciences last month, for example, AstraZeneca agreed to pay $32 a share, or a 54% premium over Ardea’s share price the day before the deal was reported. That’s well above the average 44% premium Burrill & Co. calculated for M&A deals announced in April. Viewed against the stock’s premerger 52-week high of $28.29 as of April 27, 2011, the deal represents a 13% premium. Ardea still fared better than most M&A targets in April, according to Burrill, which noted that purchase prices averaged nearly 19% below the 52-week high on the trading price of the shares of the targets.
The AstraZeneca-Ardea deal is one example of how much big pharma is willing to shell out major moolah for acquisition targets it thinks will fill holes in pipelines or product offerings. A few days later, on May 2, Novartis’ Sandoz unit paid $1.525 billion, all cash, for privately held generic dermatology drug developer Fougera Pharmaceuticals. The purchase price is 3.55 times the target’s 2011 revenue of $429 million. Sandoz and Fougera estimate that the combined company will generate $620 million a year in sales and will be the top generic dermatology medicine company in the world.
Those multiples are on the low end of recent big deals, particularly diagnostics-driven deals. On May 17, Agilent announced a $2.2 billion all-cash deal for Dako. The price Agilent will pay—the largest acquisition in its history—is almost 6.5 times Dako’s 2010 revenue of $340 million and 5.9 times the $373 million that Agilent predicts Dako will generate in 2013.
Watson Pharmaceuticals announced last month it will spend €4.25 billion (roughly $5.6 billion) plus another €250 million (about $320.3 million) in milestone payments for privately held Actavis. It expects the merger to create the world’s third-largest generic drug company with annual anticipated revenue of $8 billion this year.
The milestone payment would be carried out in contingent value rights of up to 5.5 million shares of Watson common stock next year, at $60 per share. That sounds good, except that Watson shares closed at $69.69 the day the Actavis deal was announced and reached as high as $77.73.
However, two of the most talked about unsuccessful deals this year reflect what happens when pharma giants skimp on their offers. Last month, Human Genome Sciences rejected GlaxoSmithKline’s $2.6 billion offer. Investors felt snubbed despite GSK’s 81% premium on HGS’ share price, at $13 per share, because it was less than half the 52-week high of $29.60 reached on April 27, 2011. HGS appears to have acted wisely since its share price on May 21 closed at $13.99.
Also offering less than what investors wanted was Roche, which made hostile takeover offers of $5.7 billion, or $44.50 per share, for Illumina on January 27, then a sweeter $6.7 billion bid at $51 per share on March 29. While Roche trumpeted its 64% then 88% premium over Illumina’s closing price of $27.17 before the rumor mill started churning about the deal, the offer for Illumina was well below its 52-week high of $77.88 reached on July 6, 2011. As of May 21, Illumina was trading at $43.85.