With Abbvie‘s £53.20 per share offer receiving a ‘thumbs up’ from the board of Shire (LSE: SHP), it means that shares in the healthcare stock have risen by 75% during the course of 2014. That easily beats the FTSE 100‘s performance which, despite promising so much after a strong 2013, is flat for the year thus far. Indeed, Shire has been able to gradually press Abbvie for a higher bid, with management taking the unusual step of detailing the company’s pipeline. Their aim is to double revenue by 2020 and, in doing so, deliver significantly higher profits and value to shareholders.
However, Shire isn’t the only health care company with potential. Sector peers GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and AstraZeneca (LSE: AZN) (NYSE: AZN.US) also have strong drug pipelines and growth potential. Could they be the next bid targets for other health care companies?
Differing Circumstances
Clearly, AstraZeneca has been the subject of bid approaches this year, as US peer Pfizer had multiple offers turned down by AstraZeneca’s board. There could, though, be more bids from sector peers as AstraZeneca seems to be coming to terms with its much-talked-about ‘patent cliff’, where a number of key, blockbuster drugs are set to be subject to generic competition in the coming years.
Although this challenge has been known about for some time, a change in management seems to have been the catalyst for AstraZeneca to address the projected fall in revenue, with the company undertaking numerous acquisitions to bolster the top-line. For instance, the acquisition of Bristol-Myers Squibb‘s half of the diabetes joint venture seems to position AstraZeneca for strong long-term growth, with the number of people living with diabetes in the US alone projected to increase from 11 million in the year 2000, to 29 million by 2050.
While AstraZeneca continues to be something of a turnaround story, with its pipeline improving significantly but the company still due to deliver declining profitability over the next couple of years, GlaxoSmithKline’s pipeline looks strong. It continues to offer a level of diversity within its pipeline that reduces the impact of key prospects failing at late-stage trials. Indeed, GlaxoSmithKline’s research capabilities should be bolstered by a renewed focus on the area after the sale of consumer brands such as Ribena and Lucozade. Together, this should allow GlaxoSmithKline to improve upon the 9% earnings growth forecasts for next year.
Looking Ahead
With improving and enviable respective pipelines, AstraZeneca and GlaxoSmithKline could both prove to be bid targets going forward. Indeed, two factors that could contribute to future bids are continued low interest rates (which means sector peers are able to borrow at favourable rates) and a lack of top-line growth at many other health care stocks. This factor could have proved to be the key reason in Abbvie’s targeting of Shire, with the latter offering the potential to double sales by 2020.
While GlaxoSmithKline and AstraZeneca may be unable to double their top lines by 2020, they both offer long-term potential. Therefore, it would be of little surprise for one or both to be approached by a rival over the medium term.