Thursday, April 26, 2007

AstraZeneca Acquires Medimmune: Is Big Pharma Finally Dead?

Over the last decade, we've seen, significant and, at times, rapid consolidation of the pharmaceuticals sector. I can't even begin to recall the various once-independent names from the 1980s anymore. I do recall the latter years of Roy Vagelos' reign at Merck, when it was a paragon of a well-managed company and pharma operation.

Does this week's acquisition of MedImmune by AstraZeneca (one of the big pharma giants that is the resulting combination of some of those firms whose names I can't recall) signal the final bankruptcy, from a total return perspective, of big pharma?

Is bio-pharma finally, legitimately replacing big pharma as the most efficient and effective means of discovering new medicines?

A look at the various Yahoo-sourced charts (please click on each to view a larger version) reveals some of the answer. The first chart depicts AstraZeneca's performance over the past five years, versus the S&P. Not only is AstraZeneca performing worse than the index, but it's inconsistent, as well.

Considering my latter question regarding big pharma vs. bio pharma, I charted several big pharma staples- AstraZeneca, Novartis, Merck and Glaxo, versus the S&P and Medimmune. With the exception of Novartis, the big pharma names lag both the S&P and Medimmune over the past five years.

Turning to the bio pharmas, we have this result. Gilead (one of my portfolio holdings) and Genentech lead the pack, with Genzyme and Medimmune also leading the S&P. Further, the graphic display demonstrates that Gilead and Genentech have continued to outperform recently, while the other two bio pharmas have coasted back down toward the S&P's return.

This would suggest that Carl Icahn has not lost his touch, and is focusing on one of the weaker-performing companies in a sector that is capable of far better performance.

Putting the two pharma sub-sectors together, you get this picture. Big pharma as a group clearly lags bio pharma in generating superior total returns for their shareholders. Thus, AstraZeneca is probably wise to turn to an undervalued bio pharma for help in re-igniting growth and, hopefully, the ability to generate consistently superior total returns.

Does this mean we might see additional consolidations of big pharmas chasing bio pharmas? The chart suggests it will continue to be a compelling consideration for the worst performing big pharma, Merck.

No comments: