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AstraZeneca plc (ADR) (AZN)’s Acquisition of Omthera Pharmaceuticals Inc (OMTH) Is a Desperate Act

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AstraZeneca plc (ADR) (NYSE:AZN) announced the acquisition of Omthera Pharmaceuticals Inc (NASDAQ:OMTH), a company that went public just last month (April 11). Omthera listed a price of $8 per share, and has since struggled to breach that mark until AstraZeneca plc (ADR) (NYSE:AZN) came up with an offer to acquire the company. Omthera Pharmaceuticals Inc (NASDAQ:OMTH) is a specialty drug maker with a keen focus on patients who have high levels of fats, called triglycerides, in their blood.

AstraZeneca plc (ADR) (NYSE:AZN)

The acquisition in numbers

On Tuesday, May 28, AstraZeneca announced that it would pay $12.70 per share of Omthera, representing a premium of 87% on Omthera Pharmaceuticals Inc (NASDAQ:OMTH)’s shares, as per closing price on Friday, May 24 of $6.77. Following the announcement, shares of Omthera rallied 100% to close at $13.51, $0.81 above the offer price. This might insinuate that AstraZeneca plc (ADR) (NYSE:AZN) is acquiring the company at a discount of 5.22%, as per Wednesday’s market price of $13.40 (12.53 p.m EDT), but that is not the case. The announcement just drove the stock to the rooftop, and now I fear that anyone buying at the current market price might be making a huge mistake.

When such opportunities occur, they don’t last for long, and many people end up buying when the opportunity is already gone. Nonetheless, AstraZeneca’s valuation of Omthera at $323 million, plus an additional $120 million based on performance, is somewhat ridiculous. Omthera Pharmaceuticals Inc (NASDAQ:OMTH) has a cash of $63 million, which would result in an enterprise value of $260 million, albeit with a possibility of an additional $120 million. This means that AstraZeneca could end up making a net payment of $380 million. But, even assuming that the extra $120 million is attached to the rate of return on investment, is AstraZeneca plc (ADR) (NYSE:AZN) serious by putting a cool $260 million in a company of 14 employees, one which has barely been exposed to the scrutiny of the public eye? Additionally, considering the level of risk attached to the pharma industry, was a small cap debutante the best choice? I do not think so.

Was Amarin Corporation plc (ADR) (NASDAQ:AMRN) too hard to get?

Amarin Corporation plc (ADR) (NASDAQ:AMRN) would have probably been the best option. Reports suggest that AstraZeneca has been eyeing the lucrative, rapidly growing fish oil market, designed to treat high levels of triglycerides and high-risk patients with cardiovascular disease. Amarin would have been the perfect choice, and even AstraZeneca knows it very well. Amarin Corporation plc (ADR) (NASDAQ:AMRN) has survived the scrutiny of the public eye for several years, since its listing on April 5, 1993.

The company has strong fundamentals, which have helped in keeping the faith. Reports even suggest that Amarin thought it was better placed for the acquisition, only to see an untried Omthera Pharmaceuticals Inc (NASDAQ:OMTH) beat it purely on valuation basis. Nonetheless, I believe that Amarin still holds the advantage over the new merger of Omthera and AstraZeneca plc (ADR) (NYSE:AZN), as the acquisition was a consequence of desperation. AstraZeneca was desperate to get in the act, as it looks to benefit in the rapidly growing fish oils market. Had it chosen to acquire Amarin, it would have burned close to $1 billion in cash. However, consider the case of Facebook: many would have offered to buy shares of the social network a couple of months after listing, but not six months later.

Probable immediate benefits

There are no current tangible benefits, aside from the launch of Omthera Pharmaceuticals Inc (NASDAQ:OMTH)’s Epanova, a drug that has successfully completed two Phase III tests, registering success in lowering test subjects’ high triglycerides and, in combination with a statin, HDL cholesterol levels. AstraZeneca CEO, Pascal Soriot, said,

“The number of people with elevated triglyceride levels is rising rapidly across the world, due in part to the increasing prevalence of obesity and diabetes.” Soriot added “This is an exciting acquisition that clearly complements our existing portfolio in cardiovascular and metabolic disease, one of our core therapy areas.”

AstraZeneca’s competitors are doing well, but still lag behind

AstraZeneca plc (ADR) (NYSE:AZN) faces competition from Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK) and GlaxoSmithKline plc (ADR) (NYSE:GSK). It is the smallest among the quartet with a market cap of $65.44 billion, as compared to Pfizer Inc. (NYSE:PFE)’s $201.02 billion, the largest, which is followed by Merck & Co., Inc. (NYSE:MRK) at $141.59 billion and GlaxoSmithKline with $126.16 billion worth of market cap, as of the time of this writing.

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