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Big pharma displays some desperation

How desperate is big pharma for new medicines? More than I or anybody else dreamed, as demonstrated by AstraZeneca yesterday.

To try to refill its hollow pipeline of future products, AstraZeneca is paying $15.6 billion for MedImmune, the Gaithersburg-based biotech company. It's the biggest corporate buyout in Maryland history - for a company with essentially no earnings.

The deal is a landmark not just for big pharma, which has traditionally opted for joint ventures with biotech companies rather than buyouts. It also marks a coming of age for Maryland's biotech industry and a recalibration of its value. If deep-pocketed multinational companies are this hungry for what Maryland is making, we must be doing something right.

AstraZeneca is paying 12 times what MedImmune generated in sales last year - a ridiculous number. An offer of one or two times sales will often close a deal in other kinds of businesses. Five or six times sales used to buy you a biotech company.

But not now. MedImmune's buyout price equals the valuations for some Internet outfits at the peak of the dot-com bubble. Prices, however, are discovered through supply and demand, and the demand for fresh products by organizations such as AstraZeneca would seem to be off the charts.

In recent years, AstraZeneca has had to scrap four once-promising experimental drugs after spending billions of dollars in research on them.

One drug was a blood thinner called Exanta, once hoped to be a blockbuster.

The company also placed big bets on Galida, for diabetes, and NXY-059, for strokes. Both were dumped after they were found to be ineffective. And AstraZeneca said yesterday that it would stop development of another drug, called AGI-1067, which was supposed to treat heart disease.

That leaves it dangerously dependent on Nexium for acid-reflux problems; Seroquel for schizophrenia; and Crestor for cutting blood cholesterol. Together, they accounted for 40 percent of the company's $26 billion in sales last year.

So when MedImmune came on the market, AstraZeneca was willing to pay for promising products. But nobody thought it would come to this.

Last summer, MedImmune stock sold for $25. Approval of an improved version of its FluMist nasal-spray vaccine boosted the shares to $35, and when the company said it was putting itself on the market, optimistic speculators drove the price past $45.

But $58 a share? That price, announced yesterday, doesn't just reflect AstraZeneca's desperation. Several other big pharma outfits, which face their own product-development problems, also must have badly wanted MedImmune, bid for it and forced AstraZeneca to pay the moon.

The deal is a "transformational step" for AstraZeneca, claims Chief Executive Officer David Brennan. But the only thing it's going to transform right away is AstraZeneca's pristine balance sheet, which will now sag under billions in long-term debt.

MedImmune lost money on an operating basis last year, and many of its developing products are far from the point of being prescribed by doctors.

True, the company sold $1.2 billion in medicine in 2006 - mostly Synagis, a vaccine against a kind of respiratory virus in kids. AstraZeneca's huge sales force should be able to increase Synagis' numbers as well as those of FluMist and other MedImmune medicines. AstraZeneca's labs and MedImmune's labs should fit together nicely.

But the main asset AstraZeneca brings to this deal is the kind you can put in your wallet. It's paying more for MedImmune and its nonexistent profits and 2,500 employees than FPL Group agreed to spend last year on Constellation Energy - home to 9,600 employees, three nuclear power plants, two dozen other generation facilities and a major metropolitan gas and electric utility.

"Someday," I wrote four months ago, after shareholders began agitating for a MedImmune sale, "some ... huge pharmaceutical company will buy MedImmune. ... But don't expect the match to happen for a long time. Big pharma isn't desperate enough to overpay for MedImmune, although it's getting closer."

So much for that prediction.

In this, case, big pharma was surprisingly keen on a biotech company whose promise was hard to discern on the income statement. That's good news for Maryland's biotech industry. And it's reason to break open the bubbly for MedImmune shareholders.

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