Pascal Soriot is still hard at work in patching up AstraZeneca's (NYSE:AZN) battered pipeline and five-year profit prospects. Following the announcement of an agreement to acquire Omthera (Nasdaq:OMTH) to boost the company's cardiovascular drug business, AstraZeneca announced Monday that it was acquiring development-stage COPD drug developer Pearl Therapeutics. While AstraZeneca does not appear to be buying a future blockbuster, the deal should be a relatively low-risk way to boost the company's important respiratory drug franchise and offset some of the downside risk to the five-year revenue and profit outlook.
The Deal To Be
AstraZeneca has agreed to acquire Pearl Therapeutics for up to $1.15 billion. Like the Omthera deal, this transaction is structured in such a way that AstraZeneca shareholders will be partially shielded from clinical failures (a very sensitive point given a string of pipeline failures). About half of the headline number ($560 million) will be paid upfront, while $450 million is tied to clinical milestones and $140 million is tied to sales milestones.
SEE: Analyzing An Acquisition Announcement
What AstraZeneca Is Buying
AstraZeneca is acquiring Pearl Therapeutics for its COPD pipeline. Pearl's PT003 is a LAMA/LABA combination in Phase III studies. Early study results showed solid efficacy relative to Boehringer's Spiriva, and a US filing could come in 2015.
While there are all of the normal risks that PT003 could fail in Phase III testing, there are other potential issues with this product. First, it will be the fifth combo to market (assuming everybody else stays on track) after GlaxoSmithKline (NYSE:GSK) or Theravance (Nasdaq:THRX), Novartis (NYSE:NVS), Forest Labs (NYSE:FRX), and Boeringher. Second, the twice-daily dosing (relative to Glaxo's Anoro, which is once-daily) could be a limiting competitive factor.
On the other hand, PT003 is given with a pressured metered dose inhaler (pMDI) that could make administration easier for some patients. Moreover, the drug is made using a novel co-suspension formulation technology that could have broader potential use in AstraZeneca's hands. It's also important to note that AstraZeneca had no LAMA in late-stage development, and this drug could be a valuable bridge to the pipeline MABA drug AZD2115.
It's also worth noting that Pearl has two other combinations in early-stage development, one a LAMA/LABA/ICS combo and the other a LAMA/ICS combo.
Home Runs Matter Less Than Avoiding Strike-Outs
This isn't likely to be the sort of deal that changes AstraZeneca's fortunes like Cougar Biotechnology (developer of Zytiga) did for Johnson & Johnson (NYSE:JNJ). Instead, it looks like the sort of deal that could lift AstraZeneca's batting average and get actual products out into the actual market. That fits in with the early pattern being established by new CEO Soriot – forget swinging for the fences, or at least until the company has a solid foundation beneath its feet once again. It's a strategy that helped fix Sanofi (NYSE:SNY) and it should work for AstraZeneca as well.
There's still room for bears to complain about this deal. For instance, it is fair to ask why, in a pretty hot market for biotech, Pearl chose to go with a buyout instead of an IPO. I frankly think this is a better move for Pearl - biotech market could have cooled during the IPO process, and investors would have asked pointed questions about Pearl's positioning as fifth-in-class – but this isn't going to sway AstraZeneca skeptics.
SEE: Cashing In On Corporate Restructuring
The Bottom Line
I like this deal better than the prior deal for Omthera, as I believe there's less controversy about LAMA/LABA's place in treating COPD than pharma-grade fish oil in cardiovascular disease. In both cases the deals do not massively change my long-term revenue and free cash flow (FCF) assumptions, but they do improve the probability-adjusted figures and the overall risk profile of AstraZeneca is heading in a better direction.
While I think investors are going to have to wait a while to see the proof in the financials that AstraZeneca is in better shape, a lot of the potential gains in the stock will be gone by the time that arrives. Accordingly, while I do see plenty of risk in AstraZeneca, it does offer some of the most significant capital appreciation potential within the Big Pharma sector.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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