On 14th December 2020, AstraZeneca has agreed to acquire one of the biotech giants, Alexion, for $39 billion in cash and stock. The offer price was $175 per share with a 45% premium on top of its last trading price.
AstraZeneca, the acquirer, is a red-hot global pharmaceutical company with its co development of the COVID-19 vaccine with the University of Oxford. As of 11th December, AstraZeneca’s market capitalization was $142.2 billion and a P/E Ratio of 57.13. Besides being one of the few vaccine manufacturers awaiting the regulator’s approval, AstraZeneca has been an oncology specialist with its main business on cancer-related drugs.
Alexion, the target, is a mature biotech firm focused on developing and commercializing treatments for patients with rare diseases. Alexion’s market capitalization was $26.46 billion, and a P/E ratio of 28.07 as of 11th December. Alexion is a specialist in hematology, nephrology, and neurology and has four revenue-driven products that constitute near $5 billion net product sales in the past fiscal year.
The deal value represents 6.7 times of revenue and 12.6 times of earnings before interest, tax, depreciation, and amortisation (EBITDA). Alexion shareholders will receive $60 in cash and 2.1243 AstraZeneca American Depositary Shares (ADSs), representing 15% of the combined company. The Monday after the transaction was two opposite extremes for the shareholders. Alexion’s share price soared around 30% to $156.31. On the flipside, AstraZeneca’s price plummeted 8% to $50.03. The deal is expected to close by mid-2021, subject to regulatory approval.
Why the deal is interesting/important
With Alexion being the rare disease leader, the deal signals that large pharmaceuticals are eyeing the industry, which has over 95% of the diseases remain cureless. The rare disease market is expected to grow by a low double-digit % in the future. Given the increasing control of the government bodies on drug pricing and the expectation for manufacturers to meet social standards, there will be a substantial decrease in prescription products’ cash flows. Hence, to raise profitability, these major industry players will focus on firms having clinical programs on specialty drugs and, sometimes, ultra-orphan treatments.
The deal can reshape AstraZeneca’s innovative drug development portfolio and increasing presence in immunology. AstraZeneca is known for its prescription medicines and has recently launched research and development of immunological disease medicines. Alexion’s ace product, Soliris, is a first-in-class anti-complement component 5 (C5) monoclonal antibody. While Soliris has accumulated the company’s 80% revenue in the past year, Alexion has started shifting its patients to taking Ultomiris in 2019, a second-generation C5 monoclonal antibody. With the help of AstraZeneca’s team, Ultomiris’ current process on multiple phase III programs on different indications, in addition to the other pipeline, could accelerate. It is expected that after the acquisition, the combined company will have 12 blockbusters drugs, each with more than $1 billion in revenue by 2023.
AstraZeneca’s international presence and especially in emerging markets, could help Alexion’s product reach high-population, high-demand countries in Asia. Currently, Alexion’s market restraints to the US, Germany, and Japan. However, with the rise of middle classes in China and India, there is substantial unmet demand, which provides great potential to the merged company in the future.
In terms of financials, the deal is expected to create a $500 million synergy annually by expanding Alexion’s product reach through AstraZeneca’s global presence and accelerating clinical developments. The company expects the deal to be earnings-accretive immediately, in addition to a double-digit increase in AstraZeneca’s earnings per share (EPS) in the first three years.
Uncertainties and risks
The deal was unanimously approved by the board of directors for Alexion and AstraZeneca and is now subject to receipt of regulatory clearances and approval from shareholders on both sides.
It is no doubt that the addition of Alexion’s current portfolio could immensely benefit AstraZeneca. However, the programs revolving around future pipelines have uncertainties involving setbacks and approval from the FDA. Increasing geographical tension between the US and China may also undermine the expected expansion plan from AstraZeneca. It is also worth noticing that the patent for Soliris will expire next March, with competitors such as Argenx and Apellis joining the market. Alexion will not be the monopoly of the market sooner or later.
The pharmaceutical industry is starting to recognize the profitability and potential of the rare disease industry. With the successful example of Alexion, it is predicted that the industry leaders will target the smaller peers that are focusing on other rare diseases. By leveraging established drug manufacturers’ technology and geographical presence, the rare disease drug manufacturers can increase their production capacity and delete geographical concerns in delivery. It is hoped that rare disease patients worldwide will be provided treatment options to choose from and go on to live a fruitful life.
I was surprised by the fall in AstraZeneca’s share price after the announcement of the transaction. Although investors’ concerns are mainly on AstraZeneca’s liquidity position post-deal instead of the synergy and premium paid, I believe that the 45% premium is worth every penny. According to a weighted average of discounted cash flow model with a 7.0% WACC and public comparable model, Alexion is priced at $193.8. (published in CityU Student Research and Investment Club Website) It is believed that the $175 per share acquisition price is still undervalued. Another reason to support this transaction is that Alexion’s internal manufacturing facilities are located in Ireland, despite being an American biotechnology company. This could reduce the complexity of regulatory issues during post-closing integration for the British drug manufacturer. As Alexion commercialises more and more of its pipeline in the future, the valuation will no doubt be higher than its current level. This is a once-in-a-lifetime opportunity for AstraZeneca to transition its focus to specialty and the rare disease industry.