AstraZeneca Acquire Alexion
In a chaotic year where healthcare has dominated the headlines, AstraZeneca surprised the market by announcing that they had agreed to acquire Alexion Pharmaceuticals Inc. (Alexion) for $39 billion USD. Alexion shareholders will be paid $60 USD per share in cash, as well as 2.1243 AstraZeneca American Depositary Shares (ADSs), amounting to a total consideration of $175 USD per share. [1]
The agreed price represents a 45% premium over Alexion’s share price, and will be AstraZeneca’s largest acquisition to date, assuming it receives regulatory and shareholder’s approval. [2]
Overview of Both Companies
Cambridge-based AstraZeneca is a British-Swedish multinational pharmaceutical company trading primarily on the London Stock Exchange. Additionally, they have secondary listings across the Nasdaq, Bombay Stock Exchange, National Stock Exchange of India and the Swedish OMX Exchange. Founded in 1999 through the merger of Swedish Astra AB and British Zeneca Group, they currently employ 70,000 staff worldwide and had recorded a revenue of $24 billion USD in 2019. [3]
This is not the first major acquisition by AstraZeneca, who has accumulated an extensive acquisition history over the years, including Cambridge Antibody Technology, MedImmune, Spirogen and Definiens. In 2014, AstraZeneca were themselves almost acquired by rivals Pfizer in a deal worth $118 billion USD. However, the transaction fell through at the last minute after disagreements which developed into a public battle between both companies, fuelling political concerns across the Atlantic. [4]
2020 has been an optimistic year for AstraZeneca, who have dominated headlines recently in thanks to the success of their COVID-19 vaccine in collaboration with the University of Oxford. [5]
The vaccine already has 100 million doses on order from the UK government, with many administrated already. Critically, the vaccine benefits from a drastically lower cost-per-unit in addition to the ability to be stored at room temperature, properties which the Pfizer-BioNTech and Moderna vaccines lack. [6]
It is hoped that these features will aid the distribution and storage of the vaccine, allowing it to be quickly distributed across the globe, which marks a crucial step in recovery from the pandemic. [7]
Boston-based Alexion Pharmaceuticals is a global biopharmaceutical company focused on developing life-changing therapies for people living with rare disorders. Founded in 1992, they are famously known for the development of the drug Soliris, which is used in the treatment of paroxysmal nocturnal hemoglobinuria (PNH) and atypical haemolytic uremic syndrome (aHUS). With 2,400 employees, Alexion are currently involved in immune system research relating to autoimmune diseases. [8]
Alexion reported revenues of $5 billion in 2019, which marked an increase of 21% compared to the previous year. The growth was fuelled by the launch of their second generation C5 monoclonal antibody, which is known to reduce poor immune responses. However, Alexion were trading at a relatively low price-to-earnings ratio of 9.4 at the time of acquisition, compared to AstraZeneca’s ratio of 21.9. [9]
The Deal and Rationale
Prior to the announcement of the deal, AstraZeneca had seen their share price steadily rise on the back of their vaccine’s success. However, the immediate response from the market was poor with Alexion’s shares slumping by 9% after the acquisition was announced, indicating investors’ concerns regarding the acquisition premium and a divergence from their core business model. [10]
AstraZeneca hope that the deal will help towards attaining double-digit percentage revenue growth leading to 2025, in addition to cost savings amounting to $500 Million over the next 3 years. In order to finance the deal, AstraZeneca have signed an initial year-long $17.5 Billion bridging loan provided by Morgan Stanley, J.P Morgan and Goldman Sachs. This will cover the cash part of the acquisition, refinancing and revolving the credit facilities at Alexion. Upon completion of the deal, Alexion will own 15% of the combined company. As of now, the dividend policy will remain unchanged – however, increases should be expected in due course as the board will be strategically positioned to do so. [11]
This acquisition moves AstraZeneca’s focus away from their recent direction of cancer treatment and allows the company to broaden their portfolio to encompass the attractive area of rare diseases. Furthermore, the increased scale will allow AstraZeneca to benefit from greater operational efficiencies. As for Alexion, the advantage of joining forces with AstraZeneca lies within their strong global network, which will lead to a cross-selling opportunities of their treatments outside of Europe and the USA. [12]
Currently, as few as 5% of rare diseases have approved treatments. Additionally, competition within this sector is low with a relatively small market size, allowing firms a relatively large degree of price-setting ability. Due to the lack of available treatments, it is not unusual for a drug manufacturer to hold a market monopoly over the treatment for a formerly untreated illness after the successful development of a drug. As such, the rare diseases market has a forecasted growth of over 12.2% over the next 6 years. [13]
Conclusion
In uncertain times, AstraZeneca’s surprise decision to acquire Alexion has shocked observers and investors alike. Whilst the world waited in anticipation of the regulatory approval of the COVID-19 vaccine, the boards of both companies were negotiating a blockbuster deal which will be AstraZeneca’s largest to date and one of the biggest in the explosive pharmaceutical sector. [14]
As for Alexion, the deal puts an end to a turbulent few months that left investors such as hedge fund Elliot unsatisfied, waiting for a takeover to materialise. Despite the 45% price premium, a valuation equalling less than 10x earnings is relatively low for the biotech sector. AstraZeneca hope that they can pay off the debt within three years as a result of Alexion’s strong cash flow and believe that the deal will ensure they can reach a revenue of $40 billion USD by 2023. Additionally, they hope to benefit from a rising earnings-per-share ratio, targeting double digits over the next three years. Despite the presence of cost synergies worth up to $500 million USD per year, the merits of this acquisition lie beyond cost savings. Alexion’s specialism in the rare diseases market will allow AstraZeneca access to cutting-edge research in a relatively uncompetitive sector of healthcare, which could yield large financial benefits in the coming years. [15]
It is worth noting that the proposed transaction must still receive the necessary regulatory and shareholder’s approval to go through. Finally, the risk of a rival bidder cannot be ruled out given until the deal is completed, considering the relatively low price-earnings multiple in this valuation. [16]