The top 10 overpriced drug deals ever

Amid the recent spate of Big Pharma megadeals, Pfizer’s $17 billion acquisition of Hospira looks pretty small.

After all, that’s chump change compared to the $119 billion Pfizer (PFE) offered for British drug-maker AstraZeneca (AZN) in May, though that bid was ultimately rejected.

And the price for Hospira (HSP), which specializes in injectable pharmaceuticals, still looks like a relative bargain next to Actavis’ (ACT) pending takeover of Allergan (AGN) for $66 billion—the hefty offer that trumped a hostile bid by Valeant Pharmaceuticals (VRX) last year. Indeed, the Allergan acquisition ranks as the third biggest U.S. healthcare deal in history, according to data firm Dealogic.

But compare those price tags to the true stock market value of the target companies, on the day before the deals were announced, and Pfizer’s $17 billion offer suddenly looks a lot richer. In fact, Pfizer is spending 39% more on Hospira shares than they traded in the market the previous day, one of the biggest premiums ever paid for a U.S. healthcare company according to Dealogic. And Pfizer has a history of paying up for its targets: Its $59.8 billion acquisition of Pharmacia Corp. in 2002, at a 38% premium, rates as the fifth fattest healthcare deal on record, just behind the Hospira merger.

Last year, healthcare experienced the most M&A activity of any industry, with 938 deals in the U.S. worth a record $310 billion, up 57% from the 2013 total. And while the average 34% premium for those deals did not quite reach the peak levels of 39% in 2010, they were more than twice as high as they were in 2013, Dealogic’s data shows.

Of course, the price for Hospira may look more expensive simply because the deal came as a surprise. Had speculation leaked ahead of the announcement, it likely would have sent Hospira’s shares up closer to their acquisition price. On Thursday, the day the deal was announced, Hospira’s shares closed more than 35% higher, bringing the company’s market value more in line with what Pfizer is paying.

Likewise, some of the largest, highest profile takeovers are not the most overpriced because they played out publicly over extended periods of time—and when they were finally officially announced, the target companies were already trading at a premium in the market. For example, by the time Actavis said it was acquiring Allergan for $219 per share, Allergan was trading around $200, having skyrocketed as Valeant pursued the company for months. But Actavis actually paid nearly 88% more than the $117 price of Allergan shares the day before Valeant’s interest became public.

Pfizer’s offer for AstraZeneca ultimately failed, but the American pharmaceutical giant said its original proposal last January represented a 30% premium above AstraZeneca’s previous closing price, and that its final offer in May (nearly six months later) was worth 53% more. But over that period, AstraZeneca’s shares soared by almost 40%, reflecting the amount Pfizer was willing to pay for the company.

To be sure, a fat premium does not necessarily mean an acquirer overpaid without reason, like leaving a 40% tip at a restaurant simply to clean out your wallet. In the case of Hospira, the extra goodwill could indicate a competitive, behind-the-scenes bidding war that somehow managed to stay out of the press, says Todd Munn, portfolio manager of the $2.5 billion Arbitrage Fund, which invests in takeover candidates after their acquisitions have been officially announced. (Allergan is a top holding, for example.)

Morningstar analyst Damien Conover, for one, wrote in a research note that Pfizer paid a “fair price” for Hospira, which was “justified based on Pfizer’s ability to unlock more value with its global reach,” in spite of the high premium.

As healthcare M&A continues its hot streak and more companies are taken out, smaller (target-sized) pharma firms may command higher price tags, as they become increasingly rare, Munn says. “They were starting to get gobbled up left and right, so it led to a scarcity value, which would lead to higher premiums,” he says.

At the same time, shareholders of acquiring companies may be willing to spend a little extra these days. While an acquirer’s stock price is traditionally punished when it buys another company—especially when it overpays—investing pros say that pattern has reversed recently. Both acquirer and target have received a bump in the market recently, as shareholders reward companies for striking strategic deals (and in some cases, tax inversions), putting some of their stockpiled cash to work and achieving growth through acquisitions. Pfizer investors seemed to feel similarly about the latest takeover: The company’s shares rose almost 3% on Thursday.

“Companies have been willing to take a little more risk to pay for growth,” Munn says. “So if that means paying a higher premium, companies today have been doing that.”

Below, the 10 fattest deals in U.S. pharma history, according to Dealogic.