As AstraZeneca (LSE: AZN) (NYSE: AZN.US), the number two pharma firm in the FTSE 100, is courted by US giant Pfizer, deal fever has set the pharmaceuticals sector alight. There’s a distinct whiff of ‘buy or be bought’ in pharma boardrooms, and a spate of mergers and acquisitions looks on the cards.
Shire (LSE: SHP), the Footsie’s number three drugs group, and Hikma Pharmaceuticals (LSE: HIK), which is in the mid-cap FTSE 250 index, are two companies that could well attract takeover bids. I’ve been looking at Pfizer’s offer for AstraZeneca, and at the potential price that predators might pay for Shire and Hikma.
AstraZeneca
AstraZeneca had “no hesitation” in rejecting Pfizer’s £50-a-share offer last week. Many in the City now expect the US group to come back with a £55 bid, and for the deal to go through.
Pfizer’s £50 offer represented a 32% premium to AstraZeneca’s £37.82 share price on 17 April, the day before market speculation of the possible offer lifted the price. A £55 bid would represent a premium of 45%.
AstraZeneca’s sales and earnings are falling, due to patents expiring on some of its major drugs, so historical and current-year forecast valuations aren’t really appropriate. On the assumed knockout bid of £55, Pfizer would be paying 5x analysts’ troughed-out sales forecasts and 23.5x earnings.
Shire
Shire has long been seen as a possible takeover target. According to a recent report from Reuters, Botox maker Allergan is currently looking at Shire, as a means to fend off a hostile takeover by Valeant Pharmaceuticals. Furthermore, some analysts are suggesting that AstraZeneca could mount a bid for Shire, in order to escape the clutches of Pfizer!
Shire’s shares, which are currently trading at £34.67, have been buoyed with the whole pharma sector. But, if we look at the company on a same timeline basis as Pfizer’s potential 45% premium to AstraZeneca’s 17 April share price, we get a value for Shire of about £42.50. Meanwhile, rating Shire’s current-year forecast earnings on a par with AstraZeneca’s 23.5x troughed-out earnings gives Shire a price of £44.50.
Those are my crude valuation efforts, but what do the City experts say? Analysts at Merrill Lynch, using a discounted cash flow model and typical pharma deal synergies, have come up with a price range of £40.90 to £43.90. More optimistically, their counterparts at SocGen reckon Shire could be worth up to £47.60 to AstraZeneca.
Hikma
Hikma Pharmaceuticals has plenty of attractions as a takeover target, not least its exposure to emerging markets. While the boss of this family-controlled firm once said he wouldn’t consider selling until the company reached a market value of £5bn, Hikma did consider a sale of its injectables-drug division last year, after unsolicited approaches from US group Amgen and Swiss giant Novartis, so things may have changed.
Clearly, Hikma is on the radar of some of the world’s biggest pharma players. However, the current hot link for a bid is from £11bn US firm Mylan. Acquisition-hungry Mylan has twice been knocked back by Swedish company Meda recently, and could now turn its attention to Hikma, whose shares are trading at £15.75.
Applying the AstraZeneca earnings rating and premium to Hikma, in the same way I did for Shire, gives prices of £17.15 and £21.75 for Hikma. Looking at Mylan’s bid for Meda, it was reported the offer was worth 14x analysts’ forecast earnings before interest, tax, depreciation and amortisation on an enterprise value basis. A bid for Hikma on a similar basis would imply a share price of around £18.
