Some of the gloss was knocked off AstraZeneca’s stock by its recent Covid-19 vaccine trial results. But the shares are still valued much more highly than those of most of its peers. The Anglo-Swedish drugs company is putting its paper to work in a $39bn stock-and-cash acquisition of US biotech Alexion. It is an unexpected target, but a canny one.
Admittedly, the deal will unnerve some investors. This is one of the largest US takeovers to be announced this year. AZ is paying a 45 per cent premium for a business that does not obviously fit with its own portfolio.
The immunology specialist has not attracted any suitors until now, even though frustrated investors, such as activist firm Elliott, have long hoped for a takeover. A valuation of less than 10 times forward earnings shows what investors think of its prospects. The deal will help AZ meet the $40bn revenue goal for 2023 that helped fend off a Pfizer takeover, but sceptics will worry it will prove a drag on growth.
Such fears would be misplaced. The premium is not high by biotech standards. It leaves Alexion shareholders with 15 per cent of the combined company, with the cash element amounting to just over a third of the price. The debt being taken on by AZ is likely to be paid off within three years, thanks to Alexion’s strong cash flow. The transaction will boost earnings per share by double digits for the first three years.
The low valuation of Alexion’s shares is a legacy of ill-judged mergers. Another factor is blood disease drug Soliris, which is approaching the end of its patent life. But the competitive threat to Alexion is reduced by a second generation product to which many patients are switching.
AZ can boost Alexion’s sales by selling its drugs in new markets like China. In all, AZ reckons there will be $500m a year of synergies, most of which are cost savings. That, taxed-and-capitalised, would cover less than a quarter of premium. But this deal is not primarily about consolidation.
The technology developed by Alexion complements AZ’s skills. It can be applied to more than rare diseases. Conversely, Alexion’s expertise in the fast-growing rare disease market could increase the uptake of niche discoveries coming out of AZ’s research labs. This potential will not be realised for years. But AZ has built its recent success on its scientific acumen. Investors should give it the benefit of the doubt.
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