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Pipe dreams - Talking up the price of your business can be dangerous if it does not get paid

09/07/2014

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

Should you have experienced a strong sense of déjà vu about the way AstraZeneca set about fending off what it clearly saw as the unwelcome advances of fellow pharmaceutical giant Pfizer, it may not have been solely down to Astra’s basic strategy resembling that of any other business looking to avoid a corporate predator – ‘Just look at the golden future we will enjoy if left to our own devices’.

Putting everything but the kitchen sink in the shop window is pretty much standard practice for any take-over target but, if Astra’s management seemed particularly adept at this, it may have been because some previous experience was at play – Astra’s chief executive Pascal Soriot was chief operating officer of Aventis USA when it was targeted by French pharma Sanofi-Synthélabo in 2004.

The Value Perspective is grateful to Peter McDougall of Druganalyst for reminding us of the precise form Aventis’s defence took back then. For the record, Druganalyst had had Astra as one of its few ‘buy’ recommendations in the sector – if for no better reason that its valuation was so low there had to be a deal at some point – so these views are not the sour grapes of ‘stale bears’ who have lost a fortune.

In his characteristically forthright style, McDougall notes that “on the 5th of February at precisely17.32, Aventis unleashed its devastating riposte to the Sanofi bid”, continuing: “Aventis predicted a strong rise in top-line performance far in excess of forecasts. This ‘would be a payoff from a strong research and development pipeline’.

“The group expects ‘four drugs to receive regulatory approval this year, building on five filings in 2003 in a pipeline of 94 potential treatments’. Hmm!” As it happens, the Aventis defence was unsuccessful but actually, for the purpose of this article, that is not relevant. What is relevant, we would argue, is how the five drugs filed in 2003 lived up to the enthusiastic predictions Aventis made for them.

Once again, McDougall is happy to remind us of the details. The drugs were cancer treatment Genasense, diabetes therapy Apridra, asthma drug Alvesco, vaccine Menactra and ‘sculpting agent’ – think ‘wrinkle-filler’ – Sculptra. The peak earnings estimates Aventis supplied alongside them at the time were in excess of, respectively, €2bn (£1.6bn), €400m, €1.5bn, €1bn and €1bn.

Feeling it was time to do a little work of its own, The Value Perspective ran each of those drugs through Google to see how close they came to meeting the lofty expectations Aventis had for them and found they broadly fell into two groups – those for which sales were very nearly zero and those for which sales were very actually zero.

Regardless of how well your product pipeline actually ends up doing, talking up its prospects so you end up extracting the maximum possible price from a hostile bidder may be considered something of a management masterstroke. If your hostile bidder walks away without paying any price at all, however, you had better hope the amazing pipeline of drugs about which you have raved does not disappoint.

Author

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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