Ordinarily we focus on buyer value destruction. The
Astrazenca (AST) – Pfizer (PF) Drama
illustrates sellers are also capable of snatching defeat from the jaws of
victory. PF offered $120B - 45% in cash- representing a 45% premium to AST’s
pre bid price. PF’s premium was based on cost synergies and tax savings from a
planned Tax
Inversion. AST claimed the bid undervalued the value of their drug
development pipeline and the firm by at least 7% and rejected the offer. AST’s
stock price dropped 11% upon the rejection while PF’s rose slightly. (This post
will focus on the valuation issues of the bid and ignore the political issues
of potential Job
Cuts and U.S. taxes.)
AST’s sales and income have fallen from $33.5B and $12.7B in
2011 to $25.7B and $3.7B, respectively, in 2013. The large decline is due to
the Patent
Cliff faced by many firms in the big phrama industry. AST alleges –warning:
hockey stick alert - its new drug pipeline will return sales to 2011 levels by
2017. Furthermore, 2023 sales will increase to $45B - a 75% increase over
current levels.
This raises a classic valuation duel. Is a $120B bird in the
hand now worth more than a bush containing the promise of something –TBD - larger
in 10 years? All valuation questions involve three questions:
1) How Much: what are the cash flows - not just
revenues but the costs and investments associated with a 75% sales increase
over 10 years?
2) How Long: gets to the time value of money- more
dollars are needed in 10 years to offset a current dollar.
3) How Sure: how risky are the cash flows?
The market response to these questions for AST was reflected
in the lower pre bid price. Clearly the market did not share AST’s optimistic
view of its product pipeline. AST can respond by stating the market did not
understand the pipeline - but whose fault is that - investors or AST for not
explaining it well enough? More likely, investors are concerned with the high-risk
nature of developing drugs as reflected in the continued decline in AST
revenues since 2011. So what is going on here? My belief is management is
trying to preserve its jobs by staying independent - the shareholders be
damned.
Hopefully, shareholder outrage over management’s rejection
of a valuable bird in the hand in exchange for receiving a management bird in
the face will result in one of the following:
1) Shareholder Action
will force management to reconsider the bid
2) Replace management and the board - bring in the
lawyers
3) Tie management’s compensation to the targets
they believe justify the rejection. If management wants shareholders to roll
the dice on the new drug pipeline, then management should join the shareholders
and put its money where its mouth is and wager their future compensation - ante
up boys.
OMG you can’t make this stuff up-
J
No comments:
Post a Comment