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Imagine that you are a senior pharmaceutical executive. The first thing you want to do is make certain, when you wake up in the morning, that you do not work for GlaxoSmithKline (LSE:GSK). The second thing you want to do is look out the window and make sure that you are not in China, or that the police are not knocking on your door. Even if you work for GSK anywhere else but China, you’ll still probably want to hide just from embarrassment on the news that some of your highest-ranking Chinese executives are in jail and how your share price has been a drag on the FTSE.
Or, you could wake up and find that you work for AstraZeneca (LSE:AZN). Sure, the police have questioned some of your Chinese cohorts, but it doesn’t seem to be a big deal. Things are rosy, right? It all depends on how you look at it. Your company’s share price has dropped from above the 3,500 pence mark to below the 3,100 mark then back to the 3,200 mark since 01 June. Today it is falling again, from 3,298 to 3,273. Now you start thinking about moving to China.
The biggest issue for AstraZeneca shareholders is not the corruption problem in China. It’s the product pipeline in its own labs. The patent for Seroquel has expired so AZN is taking a beating from competitors on that front. In addition, it’s patent on “the purple pill”, Nexium, another of its top revenue producers, expires in 2014. The problem is that there is really nothing far enough along and ground-breaking enough in the pipeline to replace the income generated from those two products. The life of a pharmaceutical company depends upon the continual development of new medications that it can sell at margins adequate to pay back the R&D costs and pull a healthy profit before it loses exclusivity on them. The loss of exclusivity of both Seroquel and Nexium will put a big hurt on AZN.
When a major drug firm finds itself in this position, it goes shopping. It begins looking for another firm that has something valuable in its own pipeline that it can gain through acquisition. In this case, AstraZeneca has discovered Onyx (NASDAQ:ONXX).
Onyx specializes in drugs for the treatment of blood cancer, a $61 billion market that is growing by about five percent per year. The company currently has three strong potential cancer treatment drugs in late-stage development to complement its Kryopolis, which is already available for blood cancer treatment and is expected to generate revenues approaching $2.5 billion by 2019.
The attractive thing for AZN is that Onyx is for sale and is actively pursuing bidders. The hurdle that AZN has to jump is the interest of other pharmaceutical companies facing the same problem. Potential bidders at this point include Amgen (NASDAQ:AMGN), Pfizer (LSE:PFZ)(NYSE:PFE), and Novartis (SIX:NOVN), each of which need Onyx’ offerings to boost their own portfolios.
Look for volatility in the coming months for each of these companies’ share prices. Although they would all like to acquire Onyx, my bet is that AstraZeneca needs it the most and that it will seek it the hardest.
