Valuing Sepracor Through Astra-Zeneca's MedImmune Goggles

The recent $15.6B cash offer by Astra-Zeneca (AZN) for MedImmune (MEDI) has reverberations that go well beyond the two companies involved. It provides a good insight into the mindset of “Big Pharma” as they confront the upcoming large sales declines from patent expirations at the end of the decade. The early read is they are willing to pay up – and pay up big. This is good news for Sepracor (SEPR) shareholders as it is one of the last remaining larger independent entities left that could move the needle for a pharma company craving growth.

It’s clear that the price AZN paid was the result of a competitive bidding process. The exact number isn’t public, but analysts seem to think there were four companies involved in the bidding. It’s fair to assume there are other motivated buyers out there, looking for a similarly-sized company with similar growth characteristics. MEDI and SEPR are quite similar in many respects. SEPR is growing faster while MEDI has slightly higher expected EBITDA margins. Both have a small number of products that drive the bulk of sales, which could easily be moved onto a larger company’s existing sales force.

That SEPR would be a good fit for a larger company is well known. Much like MEDI, Sepracor has been touted as a takeout candidate for a long time. What changed this week is we now know what those large companies are willing to pay in cold, hard cash. Frankly, it’s higher than I ever would have expected.

To create the data in the following graph, I took the current forward estimates for sales and earnings for both MEDI and SEPR. I calculated the P/S and P/E multiples AZN paid for MEDI, and applied them to SEPR. This leads to an average takeout target near $150/share.

If a takeout does happen, will it be at the $150 level? Probably not. For one, the “winner” of the MEDI bidding process was the most aggressive, and is no longer in the mood to do another acquisition. We don’t know if there was something specific that AZN valued within MEDI or it's pipeline. But even assuming a significant 30% haircut off of the actual multiples, you end up with a $100 price target. The stock was trading at $55 yesterday. This return might seem aggressive, but MEDI’s eventually takeout price was over 80% higher than it was trading less than 2 months earlier.

Of course, there’s no guarantee that SEPR will ever be acquired. The company hasn’t stated publicly that they are looking to be bought. However the AZN-MEDI deal shows the lengths Big Pharma is willing to go to secure some growth for the medium term.

Disclosure: Author has a long position in SEPR

Comments

[martin:]

What you fail to realize is SEPR's drugs have no intellectual property protection. Valuing SEPRs assets using 25-35x implies terminal value that SEPR simply does not have. Lunesta has but 5 years of IP life left and Xopenex either 1 or 5. MEDI's assets have another 20 years left to them.

Sorry, this is apples and oranges.

2007 Apr 27 09:03 AM

[Alan Brochs...:]

My comments are very similar, and, much to my chagrin, I was going to use the old "apples and oranges" analogy as well. I would throw in some reimbursement risk as well.

2007 Apr 27 10:11 AM