Who Wins, Who Loses in the MedImmune-Aviron Deal

The economy is in a slump, Enron is in a pickle, AT&T and Excite@Home are having Internet woes, and worries about the Middle East persist. Yet with all the negative news, consumers are still spending. No wonder the markets have been acting so moody -- up one day and down the next. It's a tough economic environment that is undoubtedly causing confusion for investors.

One thing is certain, though: Medicines, like food, do not suffer as much as businesses that seek to separate consumers from their discretionary income. Luxury items such as jewelry, fancy vacations and entertainment have been hit hard in times of economic uncertainty, as many individuals feel guilty that they might be enjoying themselves while others suffer. Drugs, on the other hand, are purchased because they are viewed as a necessity to keep us healthy and alive. So as I see it, drug demand will always be a constant in our economy.

Having said that, I think that the merger agreement between MedImmune(MEDI Quote) and Aviron(AVIR Quote) is a good match. MedImmune is using advances in monoclonal antibodies as a basis for new biologicals, while Aviron is focused on the prevention of disease through innovative vaccine technology, such as "crippled viruses" that can't cause diseases.

At this time, I would be a buyer of MedImmune, but not of Aviron. There are several reasons why:

First, Wall Street reacted negatively to the announcement, sending shares of MedImmune down sharply, primarily because it thinks Aviron's share price is too high (the price tag is a $1.5 billion stock swap to add FluMist, Aviron's nasal spray vaccine for influenza, to MedImmune's own portfolio of biologicals to treat infectious diseases).

Second, FluMist still needs to get Food and Drug Administration approval for marketing. And last, if FluMist doesn't receive FDA approval, I'm assuming the merger deal would end, and MedImmune wouldn't be liable. Therefore, if the merger doesn't get completed, it would be business as usual for MedImmune, and its share price would go back to its normal trading range. Aviron would be left holding the bag and suffer a falling share price.

On the other hand, the likelihood that FluMist will get FDA approval is strong. Aviron has conducted numerous large clinical trials that have demonstrated not only that FluMist is effective at preventing the flu, but that it is also safe. Also, Aviron has indicated that there is no need to conduct additional trials to satisfy the FDA to get the approval. If that's the case, only the timing of the approval is left, which, for obvious reasons, greatly influences the launch of FluMist. Will it be approved for the 2002-2003 flu season or the subsequent season?

Whenever FluMist gets approved, MedImmune would be getting a blockbuster drug that would reach the market sooner than any of the biologicals in its own product pipeline. This would add to MedImmune's earnings growth and share price. MedImmune would have to split FluMist revenue and profits roughly equally with American Home Products(AHP Quote) under a previously signed co-marketing agreement with Aviron. But the influenza vaccine market is huge, with estimated annual sales in the U.S. alone targeted for $1 billion. In this instance, MedImmune comes out ahead.

How would Aviron benefit from the deal? More than likely through synergy with MedImmune. MedImmune has the expertise and experience to get a unique product into the market successfully, such as Synagis, its antibody that helps prevent respiratory tract diseases, infections that afflict premature babies.

So why would I not be a buyer of Aviron? This is the sticky part. Essentially, though, it's difficult to place a value on a promise, and the market has more than likely already factored a full value into Aviron's share price to reflect a positive merger outcome, so the upside potential is limited. Looking at the different possible scenarios, then, it seems there are more cases in which MedImmune comes out ahead than ones in which Aviron does.