AstraZeneca / Alexion: the strange couple | Financial Times

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Some of the shine has been removed from AstraZeneca’s stock by recent results from its Covid-19 vaccine trial. But stocks are still valued much more than those of most of his peers. Anglo-Swedish pharmaceutical company puts paper at the service of $ 39 billion stock-and-cash acquisition of American biotechnology Alexion. It’s an unexpected target, but a tricky one.

Certainly, the operation will disturb some investors. It is one of the largest US takeovers to be announced this year. AZ pays a 45% premium for a company that clearly does not match its own portfolio.

The immunology specialist hasn’t attracted suitors so far, although frustrated investors like activist firm Elliott have long been hoping for a takeover. A valuation less than 10 times forecast earnings shows what investors think about its outlook. The deal will help AZ meet the $ 40 billion revenue target for 2023 that helped push back a Pfizer takeover, but skeptics will fear it will dampen growth.

Such fears would be misplaced. The premium is not high compared to biotechnology standards. That leaves Alexion shareholders with 15 percent of the combined company, with the cash element accounting for just over a third of the price. The debt contracted by AZ should be repaid within three years, thanks to Alexion’s strong cash flow. The transaction will increase earnings per share by double digits for the first three years.

The low valuation of Alexion’s shares is a legacy of poorly judged mergers. Another factor is the blood disease drug Soliris, which is nearing the end of its patent term. But Alexion’s competitive threat is reduced by a second-generation product that many patients are turning to.

AZ can increase sales of Alexion by selling its drugs in new markets like China. In total, AZ estimates that there will be $ 500 million per year in synergies, most of which are cost savings. That, taxed and capitalized, would cover less than a quarter of the 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 rapidly growing rare disease market could increase the adoption of niche discoveries from AZ’s research labs. This potential will not be realized for years. But AZ has built its recent success on its scientific acumen. Investors should give it the benefit of the doubt.

Lex recommends FT’s Due Diligence Bulletin, an organized briefing on the world of mergers and acquisitions. Click on here register.

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