The Novartis-AstraZeneca Deal Worst-Case Scenario

Last Updated Sep 30, 2009 3:59 PM EDT

AstraZeneca's stock is up on the news speculation that it might be a takeover target for Novartis. It's not going to happen. Here's why.

AZ and Novartis share only one thing in common: They have similar operating leverage, in that both get about $3 in revenues for every $1 they spend on reps and marketing. But the similarities end there.

AZ is facing a massive patent cliff as 43 percent of its products lose exclusivity between 2009 and 2014. While Novartis also faces generic threats, its new drug pipeline is more interesting and it has a generic unit, Sandoz, that benefits from generics. In fact, as patent expiries decimate AZ, Sandoz's revenues ought to improve on the new menu of AZ generics it can steal. From that perspective, AZ just looks like a giant problem that Novartis shouldn't have to pay to fix.

Here's AZ's current condition. Among its blockbusters, sales of Nexium are down, Symbicort is at a standstill, as is Arimidex. Crestor is a bright spot, its sales were up 33 percent (CER) to $1.1 billion. But its patent is threatened. And Seroquel is a sales success but a potential time bomb -- it carries liabilities of $593 million in legal bills.

Overall, AZ's revenues were flat at $7.9 billion; net income saw a 5.6% increase to $1.7 billion.

As far as AZ's pipeline goes, the near-term is filled with line-extensions and then it is relatively bereft for the next two years. When new drugs do begin to kick in, many of them will be entering crowded fields with lots of cheap generics, in areas such as depression, GERD, and diabetes. Its last major launch was diabetes treatment Onglyza, which has had a sluggish start.

Novartis, by contrast, just launched Coartem, a malaria treatment.

As James Knight of Collins Stewart puts it:

... the group is too big, has the wrong profile and generally just doesn't have what it takes to make it worth a takeover premium.