More than a year after Pfizer approached AstraZeneca (LSE: AZN) about a potential merger, the US pharmaceutical giant has returned to do a deal with its UK counterpart.
The deal is perhaps smaller than many investors would have liked with Pfizer agreeing to pay $550m upfront for Astra’s small molecule antibiotics business. It seems that for now at least, Pfizer is content with owning just part of Astra, rather than the whole company.
Still, the deal could give Astra a much-needed cash boost over the next few years. In total, it could net the company $1.6bn through a combination of staggered payments and royalties. As well as the $550m upfront, the US company will pay an unconditional $175m in January 2019.
The deal includes three already-approved antibiotics, Merrem, Zinforo and Zavicefta, and two drugs in clinical trials. Depending on the progress of these treatments, Pfizer will pay Astra a further $850m on top of the upfront payment.
The market’s reaction to this deal doesn’t instil confidence. Shares in Astra are trading down by nearly 1% in early deals.
Approach with caution
The market’s cautious reaction to today’s announcement is understandable. Astra is facing a massive headwind in the form of patent expirations this year and so far it looks as if the company’s only action to stem revenue declines is to sell off the family silver.
Indeed, so-called externalisation deals have become a key part of the company’s drive to boost sales. The deals involve selling some of the future upside in Astra’s drugs for one-off payments. These deals are by their very nature one-off, but Astra is using them as a key revenue stream. Last year these one-time gains accounted for some $2.5bn of Astra’s $5.5bn of operating profits. Long term this gamble by management may pay off but there’s no denying that Astra is sugar-coating short-term profits.
Today’s deal with Pfizer seems to be another attempt by management to sell off drugs for a one-off income boost.
Barring today’s deal, the bigger concern for Astra’s shareholders is how quickly the company’s sales decline after Crestor, Astra’s best-selling treatment comes off patent. The substance patent for Crestor expired, on 8 July, a week after the end of Astra’s Q2, so as of yet, investors have no idea how the company is faring in the new environment. The patent was set to expire at the beginning of January, but AstraZeneca won a six-month extension under the US paediatric trials incentive programme.
The bottom line
Overall, today’s deal with Pfizer isn’t a game-changer for Astra. While management will welcome the additional cash, until the full impact of Astra’s loss of exclusive manufacturing rights for Crestor is known, the market will likely view the company with caution.
City analysts expect Astra to report a 5% decline in EPS for 2016. Based on these forecasts the company is trading at a forward P/E of 16.5 and the shares support a dividend yield of 4.2%.
