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Pharmaceutical and biotech mergers and acquisitions (M&A) is on track to hand us the best year for non-mega merger deals since 2010 - which is delivering juicy profits for anyone investing in drug stocks.
On Monday, Dublin-based pharmaceutical firm Shire (Nasdaq ADR: SHPG) announced that it will buy Pennsylvania-based ViroPharma (Nasdaq: VPHM) for $4.2 billion in cash. The $50 per share purchase price is a 27% premium to Viropharma's Friday close and a 64% premium to the price when sale rumors first emerged this summer.
Shire's acquisition is "strategically very sound" despite the "eye-watering" multiple, Panmure Gordon analyst Savvas Neophytou told The Wall Street Journal. Pharmaceutical companies typically pay between five and 6.5 times sales, he said. Shire is paying nine times estimated 2013 sales for ViroPharma.
But Shire gets quite a bit for its $4.2 billion...
ViroPharma's main product is Cinryze, a treatment for chronic hereditary angioedema. Cinryze complements another Shire product, Firazyr, which treats acute attacks of the same disease. The acquisition will allow Shire to capitalize on its highly trained Firazyr sales force.
The purchase will bring Shire's rare drug portfolio to 40% of total sales, easing its dependence on attention deficit hyperactivity disorder medications Vyvanse and Adderall.
In addition, Shire expects the acquisition to result in $150 million in cost savings by 2015.
The deal, Shire's third this year, is just the latest in a wave of mergers and acquisitions driving up drug companies' share prices. The Dow Jones U.S. Pharmaceutical Index is around $400, up from $330 in December.
Deal value for the first half of 2013 was $29 billion with 72 transactions, according to industry analyst EvaluatePharma's 2013 half-year review.
Add Amgen Inc.'s (Nasdaq: AMGN) August $10.4 billion offer for Onyx Pharmaceuticals Inc. (Nasdaq: ONXX), Perrigo Co.'s (NYSE: PRGO) July purchase of Elan Corp. (NYSE ADR: ELN) for $8.6 billion, and the Shire deal, and the year-to-date deal value for pharma/biotech M&A hits more than $50 billion.
Most of that value has come from a few large transactions, notably Valeant Pharmaceutical Intl Inc.'s (NYSE: VRX) $8.7 billion acquisition of Bausch + Lomb, and Actavis PLC's (NYSE: ACT) $8.5 billion purchase of Warner Chillcott PLC.
And the acquisitions will continue into 2014.
Why Pharma M&A Is Still Hot
There are two very good reasons M&A is so popular right now for pharmaceutical and biotech companies.