After the spread of Covid-19 pandemic, healthcare concern has become a priority for the population all around the world and a profitable opportunity for the big pharma companies, especially for those involved in the development of the Covid-19 vaccine. One of the leading players in this 10-months rush is undoubtedly AstraZeneca: among the others, the UK-based drug maker, which is working with a University of Oxford-based biotech company and has relied on a mainly privately-funded $8.19bn investment, has received the largest amount of pre-orders (3.29bn). Whereas those selling to countries with deeper pockets will start to see a return on their investment in the incoming months, AstraZeneca has pledged to sell its vaccine at a price that only covers theirs costs, with currently looks set to be the cheapest at $4 (£3) per dose. Since this commitment is meant for the "duration of the pandemic", AstraZeneca could start charging higher prices very soon, depending on the path of the disease.
At a time in which AstraZeneca has seen a massive amount of publicity due to their development and planned distribution of the Covid-19 vaccine, the company is ready to expand its portfolio with the acquisition of the American pharmaceutical company Alexion, taking on the challenging rare diseases treatment industry.
After the deal being announced on December 12th, 2020, the $39bn acquisition of Alexion by AstraZeneca is now almost complete. The biggest deal yet for AstraZeneca, and also the largest agreement struck by a pharmaceutical company since the start of the Covid-19 pandemic, would allow the UK pharma giant to expand their expertise past oncology and into other areas such as immunology.
AstraZeneca & Alexion
The Anglo-Swedish acquiring company, AstraZeneca, is a leader in the pharmaceutical industry and has built a growing scientific presence in oncology and in cardiovascular diseases, with a focus on organ protection. Known for its blockbuster drug litocaine, a drug used for local anaesthetic, AstraZeneca has developed a broad range of technologies and has recently increased its efforts in immunology research and the development of medicines for immune-mediated diseases.
Founded in 1992, Alexion is an American Pharmaceutical company which has pioneered complement inhibition for a wide spectrum of immune-mediated rare diseases caused by uncontrolled activation of the complement system, a fundamental part of the immune system. Alexion's groundbreaking effort has brought about the development of Soliris and its renewed version Ultomiris, the company’s two flagship drugs for treating rare blood disorders. According to the company, in Q3 of FY2020 more than 70% of patients in their leading markets, the US, Japan, and Germany, had switched from Soliris to Ultomiris, an incredibly promising development.
During 2019, Alexion generated a total revenue of $5bn, with nearly $4bn in sales coming from Soliris, and profit before tax of $2.2bn. The company’s current EV/EBITDA multiple, a measure of how well the market is rewarding the firm, has fallen from 20.6 in 2018 to 8.3, which is significantly below the nearly 14.5 figure for the pharma industry. This huge drop could signal a buying opportunity.
The competitive threats coming from the giants of the pharma industry have not slowed down the company’s top-line growth, reaching 20.8% YoY growth in 2019, up from 16.6% YoY growth four years ago. The cash and equivalents stood 184.5% higher than the level in 2015, while net debt to EBITDA was negligible compared to 2.6x five years ago.
Rationale
Thanks to its strong commercial portfolio and robust pipeline and Alexion’s leading expertise in complement biology, the acquisition will support AstraZeneca in its long-term ambition to develop innovative medicines. Alexion’s flagship drugs will seriously increase AstraZeneca’s top line, as well as widening its revenue sources beyond their oncology and primary focus. As a matter of fact, over 7,000 rare diseases are known today and less than 5% have US FDA-approved treatments. Being a high-growth therapy area with rapid innovation and significant unmet medical need, rare diseases are a promising area for big pharma companies for a couple of reasons. Of course, these drugs are sold at a steep price, whereas expenses are usually born by insurers (Soliris, for instance, costs around $600k per year). A second reason is that margins on such products are well above the average: given their highly specialized nature and limited competition in the sector, very low marketing investments are required.
With Alexion's R&D team, the combined Group will work on its pipeline of 11 molecules across more than 20 clinical-development programmes across the spectrum of indications, in rare diseases and beyond. Indeed, expanding into the more lucrative specialty care market has always been a strategic priority for AstraZeneca.
The acquisition is also expected to enchance the combined group’s profitability and, in particular, the core operating margin in the short term. What is more, 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 raise capital at extremely low rates, a non-neglectable incentive for the acquisition and its timing. The company expects pre-tax synergies upwards of $500mn, generated from commercial and manufacturing efficiencies as well as savings in central costs, with full run-rate expected to be achieved by end of the third year following completion of the acquisition.
The acquisition also strengthens AstraZeneca's cash-flow generation: projections suggest that the drugmaker will benefit from a $6bn revenue boost from the acquistion, providing additional flexibility to reinvest in R&D and rapid debt reduction, with an ambition to increase the dividend.
Deal details
Both Alexion and AstraZeneca’s board of directors have approved the transaction and the latter will acquire 218,720,567 Alexion shares representing 100% stake in cash cum stock transaction: Alexion shareholders will receive $60 in cash and 2.1243 new AstraZeneca American Depositary Shares (ADSs) listed on the Nasdaq exchange for each of their Alexion shares. The cash and ADS consideration represents a 44.9% premium to Alexion shareholders based on the $120.98 closing stock price of Alexion on 11 December 2020 and a premium of 39.6% based on closing price of USD 125.60 as of 12 November 2020, one month prior to the announcement. This means a total consideration for Alexion shareholders of $38.33bn or $175.28 per share, based on AstraZeneca's reference average ADR price of $54.27
Even with the premium, Alexion’s valuation would stand at a reasonable 15.48x (Y1), making it a fair deal for AstraZeneca. However, analysts at SVB Leerink commented: “While we have long suggested that $175 was the right range for the acquisition, in today’s inflacted market we believe investors could demand more from AstraZeneca, or another acquirer”. They added: “This is such a scarce and high-quality asset that in this instance, the final transaction price may need to reach $200 to satisfy Alexion’s shareholders, or to be based more in cash, rather than predominantly in stock”.
Financing
To support the financing of the offer consideration, AstraZeneca has entered into a new committed $17.5bn bridge-financing facility, provided by Morgan Stanley, J.P. Morgan Securities plc and Goldman Sachs. The loan has been designed for an initial term of 12 months, starting from the earlier between the completion of the acquisition and 12 December 2012; AstraZeneca will then be allowed to extend it for six months, no more than twice. The initial financing is intended to cover the cash portion of the acquisition consideration and associated acquisition costs and to refinance the existing term loan and revolving credit facilities of Alexion. In due course, AstraZeneca intends to refinance the initial bridge-financing facility through a combination of new medium-term bank loan facilities, debt-capital market issuances and business cash flows.
To conclude, AstraZeneca will see its revenues increase considerably in the short-term thanks to the distribution of the Covid-19 vaccine, but costs will grow accordingly. With its latest acquisition, the company will expand its portfolio as well as enhance profitability and cash-flow generation. Nevertheless, with a bridge loan of $17.5bn necessary to fund the transaction, AstraZeneca may face headwinds internally in their finances and the firm’s free cash will go towards paying debts rather than funding new ventures. Therefore, servicing debt and dividends will remain priorities rather than funding an already weak pipeline of potential products.
Alessandro Maraldi
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At a time in which AstraZeneca has seen a massive amount of publicity due to their development and planned distribution of the Covid-19 vaccine, the company is ready to expand its portfolio with the acquisition of the American pharmaceutical company Alexion, taking on the challenging rare diseases treatment industry.
After the deal being announced on December 12th, 2020, the $39bn acquisition of Alexion by AstraZeneca is now almost complete. The biggest deal yet for AstraZeneca, and also the largest agreement struck by a pharmaceutical company since the start of the Covid-19 pandemic, would allow the UK pharma giant to expand their expertise past oncology and into other areas such as immunology.
AstraZeneca & Alexion
The Anglo-Swedish acquiring company, AstraZeneca, is a leader in the pharmaceutical industry and has built a growing scientific presence in oncology and in cardiovascular diseases, with a focus on organ protection. Known for its blockbuster drug litocaine, a drug used for local anaesthetic, AstraZeneca has developed a broad range of technologies and has recently increased its efforts in immunology research and the development of medicines for immune-mediated diseases.
Founded in 1992, Alexion is an American Pharmaceutical company which has pioneered complement inhibition for a wide spectrum of immune-mediated rare diseases caused by uncontrolled activation of the complement system, a fundamental part of the immune system. Alexion's groundbreaking effort has brought about the development of Soliris and its renewed version Ultomiris, the company’s two flagship drugs for treating rare blood disorders. According to the company, in Q3 of FY2020 more than 70% of patients in their leading markets, the US, Japan, and Germany, had switched from Soliris to Ultomiris, an incredibly promising development.
During 2019, Alexion generated a total revenue of $5bn, with nearly $4bn in sales coming from Soliris, and profit before tax of $2.2bn. The company’s current EV/EBITDA multiple, a measure of how well the market is rewarding the firm, has fallen from 20.6 in 2018 to 8.3, which is significantly below the nearly 14.5 figure for the pharma industry. This huge drop could signal a buying opportunity.
The competitive threats coming from the giants of the pharma industry have not slowed down the company’s top-line growth, reaching 20.8% YoY growth in 2019, up from 16.6% YoY growth four years ago. The cash and equivalents stood 184.5% higher than the level in 2015, while net debt to EBITDA was negligible compared to 2.6x five years ago.
Rationale
Thanks to its strong commercial portfolio and robust pipeline and Alexion’s leading expertise in complement biology, the acquisition will support AstraZeneca in its long-term ambition to develop innovative medicines. Alexion’s flagship drugs will seriously increase AstraZeneca’s top line, as well as widening its revenue sources beyond their oncology and primary focus. As a matter of fact, over 7,000 rare diseases are known today and less than 5% have US FDA-approved treatments. Being a high-growth therapy area with rapid innovation and significant unmet medical need, rare diseases are a promising area for big pharma companies for a couple of reasons. Of course, these drugs are sold at a steep price, whereas expenses are usually born by insurers (Soliris, for instance, costs around $600k per year). A second reason is that margins on such products are well above the average: given their highly specialized nature and limited competition in the sector, very low marketing investments are required.
With Alexion's R&D team, the combined Group will work on its pipeline of 11 molecules across more than 20 clinical-development programmes across the spectrum of indications, in rare diseases and beyond. Indeed, expanding into the more lucrative specialty care market has always been a strategic priority for AstraZeneca.
The acquisition is also expected to enchance the combined group’s profitability and, in particular, the core operating margin in the short term. What is more, 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 raise capital at extremely low rates, a non-neglectable incentive for the acquisition and its timing. The company expects pre-tax synergies upwards of $500mn, generated from commercial and manufacturing efficiencies as well as savings in central costs, with full run-rate expected to be achieved by end of the third year following completion of the acquisition.
The acquisition also strengthens AstraZeneca's cash-flow generation: projections suggest that the drugmaker will benefit from a $6bn revenue boost from the acquistion, providing additional flexibility to reinvest in R&D and rapid debt reduction, with an ambition to increase the dividend.
Deal details
Both Alexion and AstraZeneca’s board of directors have approved the transaction and the latter will acquire 218,720,567 Alexion shares representing 100% stake in cash cum stock transaction: Alexion shareholders will receive $60 in cash and 2.1243 new AstraZeneca American Depositary Shares (ADSs) listed on the Nasdaq exchange for each of their Alexion shares. The cash and ADS consideration represents a 44.9% premium to Alexion shareholders based on the $120.98 closing stock price of Alexion on 11 December 2020 and a premium of 39.6% based on closing price of USD 125.60 as of 12 November 2020, one month prior to the announcement. This means a total consideration for Alexion shareholders of $38.33bn or $175.28 per share, based on AstraZeneca's reference average ADR price of $54.27
Even with the premium, Alexion’s valuation would stand at a reasonable 15.48x (Y1), making it a fair deal for AstraZeneca. However, analysts at SVB Leerink commented: “While we have long suggested that $175 was the right range for the acquisition, in today’s inflacted market we believe investors could demand more from AstraZeneca, or another acquirer”. They added: “This is such a scarce and high-quality asset that in this instance, the final transaction price may need to reach $200 to satisfy Alexion’s shareholders, or to be based more in cash, rather than predominantly in stock”.
Financing
To support the financing of the offer consideration, AstraZeneca has entered into a new committed $17.5bn bridge-financing facility, provided by Morgan Stanley, J.P. Morgan Securities plc and Goldman Sachs. The loan has been designed for an initial term of 12 months, starting from the earlier between the completion of the acquisition and 12 December 2012; AstraZeneca will then be allowed to extend it for six months, no more than twice. The initial financing is intended to cover the cash portion of the acquisition consideration and associated acquisition costs and to refinance the existing term loan and revolving credit facilities of Alexion. In due course, AstraZeneca intends to refinance the initial bridge-financing facility through a combination of new medium-term bank loan facilities, debt-capital market issuances and business cash flows.
To conclude, AstraZeneca will see its revenues increase considerably in the short-term thanks to the distribution of the Covid-19 vaccine, but costs will grow accordingly. With its latest acquisition, the company will expand its portfolio as well as enhance profitability and cash-flow generation. Nevertheless, with a bridge loan of $17.5bn necessary to fund the transaction, AstraZeneca may face headwinds internally in their finances and the firm’s free cash will go towards paying debts rather than funding new ventures. Therefore, servicing debt and dividends will remain priorities rather than funding an already weak pipeline of potential products.
Alessandro Maraldi
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here.