By Itai Almogy, Gaspard Baroudel, Raphael Berz (Yale University), and Nathan Walemba (Oxford University)
Overview of the deal
Acquirer: AstraZeneca PLC
Total Transaction Size: $39 Billion
Closed date: Q3 2021
Target advisor: Bank of America
Only after 80 days since the deal being announced, the $39bn acquisition of Alexion by AstraZeneca is now complete. The biggest deal yet for AstraZeneca would allow the UK Pharma Giant to expand their expertise past Oncology and into other areas such as Immunology. There are some analysts however who question the strategic rationale of the deal, citing some longer-term risks with expiring patents. That being said, the combined company will be able to scale significantly, thereby reducing costs and thus operating in a more efficient manner. The acquisition comes at a time where AstraZeneca has seen a massive amount of publicity due to their development and planned distribution of an affordable Covid-19 vaccine in coalition with Oxford University.
“Alexion has established itself as a leader in complement biology, bringing life-changing benefits to patients with rare diseases… This acquisition allows us to enhance our presence in immunology” - AstraZeneca CEO Pascal Soriot
Company Details: Acquirer - AstraZeneca PLC
Founded in 1999, AstraZeneca is a global leader in the pharmaceutical industry conducting major research into areas such as cancer to cardiovascular diseases. It is best known for its blockbuster drug lidocaine, a drug used for local anaesthetic.
Founded in 1999, headquartered in Cambridge, United Kingdom
CEO: Pascal Soriot
Number of employees: 70,600
Market Cap: $142.46B (as of 18/12/2020)
LTM Revenue: $25.87B
LTM EBITDA: $7.7B
LTM EV/Revenue: 6.04
LTM EV/EBITDA: 18.86
Company Details: Target - Alexion
Alexion is an American Pharmaceutical company renowned for its groundbreaking work in the development of Soliris, a drug used to treat very rare disorders, as well as Ultomiris, a newer drug aimed at helping the same set of patients. The company Alexion also carries out significant research into autoimmune diseases and other areas of immune system research.
Founded in 1992, headquartered in Boston, Massachusetts
CEO: Ludwig N. Hantson
Number of employees: 2,525
Market Cap: $26.48B (as of 18/12/2020)
LTM Revenue: $5.86bn
LTM EBITDA: $3.1bn
LTM EV/Revenue: 15.62
Projections and Assumptions
Buying Alexion allows AstraZeneca to significantly expand and diversify their cash-flows in the short-term. Projections suggest AstraZeneca will benefit from a $6bn revenue boost from the acquisition, and the drugmaker expects that figure to grow by 9% a year through to 2023. Analysts believe that this is part of a broader strategy aimed at increasing R&D spending, debt reduction, and a dividend increase. That being said, investors sold off shares in AstraZeneca in response to the announcement, with the share price falling by more than 7%, reflecting an $11bn decrease in market capitalization. Market sentiment is that the offer of $175 a share for Alexion, a 45% premium on the current share price may have been excessive, especially since AstraZeneca had to take out a $17.5bn bridge loan to finance the deal.
Through the acquisition, AstraZeneca ventures into the lucrative space of immunology and rare diseases. Soliris and Ultomiris, Alexion’s flagship drugs, are both treatments for rare blood disorders. While the subset of patients taking these is quite small, the drug treatments run patients several hundred thousand dollars annually, bringing in significant revenue. Soliris, an established drug, brought in nearly $4bn in sales in FY2019. Ultomiris, an improved version, is set to take over — in Q3 of FY2020, Alexion reported that more than 70% of patients in their leading markets, the US, Japan, and Germany, had switched from Soliris to Ultomiris, an incredibly promising development. The flagship drugs will seriously increase AstraZeneca’s top line, as well as diversifying the pharmaceutical giant’s revenues beyond their oncology and primary focus. Expanding into the more lucrative specialty care market has been a strategic priority for AstraZeneca.
AstraZeneca’s international reach will allow for expansion of Soliris and Ultomiris past their primary markets, notably into China, representing a significant untapped opportunity. The acquisition allows AstraZeneca to enter the rare-disease therapy market as an instant leader. According to the company’s press release, there are over 7,000 known rare diseases, yet only ~5% have FDA-approved treatments, representing massive potential upside. AstraZeneca plans to capitalize on Alexion’s pipeline of 20 clinical development projects, striving to convert the significant R&D spend into revenue.
The acquisition comes at a time when capital markets activity is booming, and treasury rates are near 0%, allowing for strong investment-grade firms such as AstraZeneca to access capital at incredibly low rates, likely comprising part of the rationale behind the acquisition and its timing. The company expects pre-tax synergies upwards of $500mn, in addition to a one-time cost of $650mn associated with the integration of Alexion.
Risks and Uncertainties
AstraZeneca may face headwinds internally in their finances, as well as from competitors and regulators. The company, whose balance sheet was strained by over $22B in debt, is seeking a bridge loan in the amount of $17.5B to fund the transaction. As a result, the firm’s free cash will go towards paying debts rather than funding new ventures. AstraZeneca remains optimistic: a December 12 press release reported that stronger margins and cash flow will “enable rapid debt reduction.” S&P recently upgraded the outlook on AstraZeneca’s long-term debt to positive. Nevertheless, servicing debt and dividends will remain priorities rather than funding an already weak pipeline of potential products. AstraZeneca has few prospects for facing fierce competitors and a concentrated market.