Drug deal shows how huge is the new little
When a company like Roche buys InterMune for $8 billion and calls it a mere bolt-on, you know you're seeing signs of a much bigger trend.
You want to know what's the biggest change that has come over mergers and acquisitions in the past few years? No, it is not inversions. It's the definition of "bolt-on." This morning I sat and listened in amazement to how Roche described the $8.38 billion purchase of InterMune (ITMN) as a bolt-on acquisition that fits right into the company's emphasis on pulmonary care drugs.
Since when is $8.3 billion a bolt-on? That's like saying that a Cartier ring is a bolt-on to your jewelry collection.
In truth, all of the major drug companies are challenged for new products and are scrambling to make acquisitions just like this one, even as it is a 38 percent premium to where the stock went out on Friday and the stock was already up 265 percent for the year. They are scrambling because their own labs simply seem incapable of the kind of greenfield breakthroughs that biotechs are developing.
This spring InterMune produced test results of Pirfenidone, its anti-idiopathic pulmonary fibrosis drug that showed dramatically life-saving possibilities against an illness that is now pretty much a death sentence. The compound, which addresses a disease that affects about 100,000 people a year, will most likely be approved by year's end. There is nothing else on the market that has been able to arrest this progressive disease, so Roche will presumably have the market all to itself. Roche has a small pulmonary business with its own sales force, and this drug will help it diversify away from its core oncology business. We highlighted this biotech company after TheStreet's Adam Feuerstein reported that there might be some very promising trials going on for this lead InterMune drug.
What else do we know about InterMune? How about that it is profitless? How about that it has lost more than a billion in the past nine years? How about that it has an amazingly overstretched valuation, to use the term that the Fed recently got nailed using when it talked about what's wrong with the stock market right now? How about the fact that there were apparently other, equally challenged buyers out there that forced Roche to reach so high to get it?
Which brings me back to the new definition of bolt-on. Typically, on a conference call when analysts are worried that a company might do a big expensive acquisition, management soothes them with the words that if they do anything at all, not to fret, it will just be bolt-on. I think what we have here after this bid is a new definition of bolt-on, one that says: "Nearly 10 billion is not anything to be concerned or worried. It's simply a welcome little addition to the product portfolio."
Little, though, now encompasses what huge used to be. That's why you can now cull over all of these one- and two-product, money-losing biotechs and try to find those that have important stage-three trials for unmet needs of 100,000 people or so and recognize that they, too, could be the subject of bolt-on acquisitions that can give you a 300 percent return in a year.
It's still one more piece of evidence that this dissed and allegedly distended market, so often labeled as propped up by the Fed, just keeps giving you amazing gifts when you least expect it. That's because $8 billion, once a monumental amount, is now just small change to these gigantic companies challenged to stay relevant when they are so focused on beating estimates, paying big dividends and just staying one step ahead of the shrinking price-to-earnings multiple posse.
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Expect the mergers to continue and anti-monopoly laws abandoned soon
is this a puppet company? one who is an R&D loss center for losses to be used by the parent company? how can some company lose so much for so long and stay afloat if not propped up by someone else?
"""What else do we know about InterMune? How about that it is profitless? How about that it has lost more than a billion in the past nine years? """
The tax break allows foreign earnings to be taxed at a rate of 5.25%, which is significantly lower than the usual rate of 35%. Previously, much of the earnings derived from foreign countries were not transferred back to the U.S. because multinationals can defer paying taxes on foreign earnings until they decided to send the earnings back in the form of a dividend.
Ultimately, the government's rationale is that the tax break would act as a good incentive for American multinationals to send their foreign earnings back to the U.S., and then use the earnings to create more American jobs and/or expand operations in the U.S.
Critics of the idea believe that because the companies aren't required to use the repatriated earnings for the sole purpose of American job creation (but the bill does prevent companies from using the money for executive compensation, and stock ), it is not assured that the tax break will increase job creation. Furthermore, the tax break can be seen as a reward for companies that are deferring regular repatriation of foreign earnings and a punishment for companies that regularly send money back. As a result of this, critics also worry that this act sets a bad precedent, as U.S. multinationals may see this tax break as an incentive to withhold future foreign earnings in the hope that another repatriated tax break will occur.
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