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AstraZeneca to Buy Ardea Biosciences

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AstraZeneca plc (AZN) announced that it has entered into an agreement to acquire Ardea Biosciences, Inc. (:RDEA) for a consolidated cash value of approximately $1.26 billion or $32 per share. Both AstraZeneca and Ardea’s boards have unanimously supported the deal. The deal is expected to close in second or third quarter of 2012, subject to certain regulatory conditions, which includes approval by Ardea’s shareholders.

Ardea, headquartered in San Diego, CA, is a biotech company. The company primarily develops small-molecule therapeutics for treating serious diseases such as gout and cancer. Ardea‘s lead candidate is lesinurad for the chronic treatment of gout, with US and EU regulatory filings planned for the first half of 2014. The pipeline also includes oncology candidate, BAY 86-9766, and gout candidate, RDEA3170.

On approval, the gout candidates will target a highly lucrative market. We note that the incidence and severity of gout is increasing in the US. The market has a huge unmet need with Takeda Pharmaceutical’s (TKPYY) Uloric (febuxostat) and allopurinol being two widely-prescribed therapies (xanthine oxidase inhibitors) for the treatment of gout patients. The inhibitors reduce the production of uric acid in the body.

However, the effectiveness of xanthine oxidase inhibitors is limited since only approximately 10% of patients affected by gout are over-excretors of uric acid. Many gout patients fail to respond favorably to these therapies. This should provide lesinurad, which is being evaluated both as add-on and monotherapy, and RDEA3170 the opportunity to capture the gout market share.

Though the source of funds for the Ardea deal were not disclosed, it is possible that the cash balance of $7.6 billion at the end of December 31, 2011, enabled the company to fund the acquisition. Apart from its cash balance, AstraZeneca has committed bank facilities of $3.6 billion at its disposal.

Neutral on AstraZeneca

We are encouraged by the company’s focus on the high-potential emerging markets and are pleased with the company’s effort to drive the bottom line through cost-cutting initiatives and share buybacks.

However, we remain concerned about the generic competition faced by its key products. In 2011, the company lost revenues worth almost $2 billion to generic competition. The weak late-stage pipeline coupled with the slow Brilinta uptake also bothers us. We currently have a Neutral recommendation on AstraZeneca. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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