AstraZeneca's big, risky $15 billion bet

AstraZeneca stock falls, MedImmune surges on news of $15 billion merger; analysts say benefits of deal won't emerge for years.

By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- AstraZeneca's stock tumbled Monday after the company said it would pay $15 billion to acquire MedImmune, a deal that some industry analysts are calling too expensive, and risky.

The deal's near-term benefit is limited, analysts say, but they believe the deal may make AstraZeneca more competitive in the fast-growing biotech sector in years to come.

"The rumor of MEDI being bought has been in the market for several weeks, but there was little expectation that the deal would be as big as it is," wrote Hamed Khorsand, analyst for BWS Financial, in a published note.

AstraZeneca's (Charts) stock slid 5 percent following the announcement while MedImmune's (Charts) stock surged 18 percent. That's on top of MedImmune's 14 percent stock gain on April 12, when the company said it was exploring "strategic alternatives," Wall Street code for considering a buyer.

British drug giant AstraZeneca PLC agreed to pay $58 a share in an all-cash $15.2 billion transaction for MedImmune, Inc., a Maryland-based mid-cap biotech.

"I couldn't say it's a bargain at this point," said Gbola Amusa, analyst for investment research firm Sanford C. Bernstein. Amusa said that although AstraZeneca paid $58 a share, it would have only had to cap its bid at $44 a share "just to break even" in achieving short-term profitability on the deal.

But the deal could pay off five or 10 years in the future, said Amusa, when MedImmune's vaccine platform eventually gives the company a competitive edge in the fast-growing biotech sector.

Amusa noted that the biotechnology sector, which develops drugs through living organisms, rather than chemical compounds, is growing twice as fast as Big Pharma.

Khorsand of BWS noted that MedImmune's "vast" pipeline made it a "a prime target to be acquired by a large pharmaceutical company."

MedImmune's top-selling product is Synagis, the blockbuster treatment for a common respiratory virus. The drug accounted for about $1.1 billion of the company's $1.2 billion in annual sales in 2006. That year saw sales for the company's nasal flu vaccine FluMist totaling $36 million and sales for Ethyol, a drug to reduce chemotherapy side effects, at $87 million.

MedImmune is in late-stage testing for the experimental Numax, the next-generation drug for Synagis.

The next deal?

Large drug companies sometimes absorb biotechs to bolster weak pipelines as patents on blockbuster drugs expire. Pfizer, the No. 2 drugmaker in terms of sales, hinted that it could have a deal in the making.

In an earnings call on Friday, Pfizer (down $0.68 to $26.29, Charts, Fortune 500) chief executive Jeffrey Kindler said the company was working to "establish more collaborative relationships," a hint that mergers and other deals might be on the way.

Pfizer recently lost its status as the top drugmaker on the Fortune 500 to Johnson & Johnson, partly because Pfizer sold its consumer health division to Johnson & Johnson (down $0.28 to $64.84, Charts, Fortune 500) in 2006 for more than $16 billion. But Pfizer is still the biggest drugmaker as measured by pharmaceutical sales, when consumer product sales are excluded.

Some analysts believe Pfizer might have been freeing up cash to buy biotechs with promising pipelines with that deal.

The analysts quoted in the story do not own stock in the companies mentioned here though Bernstein has conducted non-investment banking-securities related services and makes a market in MedImmune. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.