Monday, June 5, 2023

Why shareholders had a serious adverse reaction to AstraZeneca’s deal with Alexion

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AstraZeneca purchase Alexion in a $ 39 billion cash and stock deal didn’t impress AZ investors. They brought the company’s shares down sharply in Monday morning trading.

At one point, AZ shares on the London Stock Exchange fell more than 7%, before rebounding slightly.

Investors fear AstraZeneca is paying too much Alexion, offering a 45% premium to the Boston-based company’s current share price, valuing the company at more than 40 times its 12-month earnings.

While some have pointed out that this type of valuation is inexpensive by biotech standards, AZ shareholders suffer from the market equivalent of the empty restaurant curse – that uneasy feeling based on the notion that “if this place is so good, why no one else eats here? Alexion has been actively seeking a buyer since at least May, when activist hedge fund Elliott Associates began campaigning publicly for a sale. And, AstraZeneca said that while it took months of wrangling to secure the deal, to its knowledge it was the only bidder in the hunt.

It hasn’t been a good week for AZ stocks. The malaise over the deal comes just weeks after investors crushed AstraZeneca stock because the results of the company’s COVID-19 vaccine were disappointing. While the Cambridge, England-based pharmaceutical company had quickly took the lead in the coronavirus vaccine race in the spring, a position that shot its shares to record highs and briefly made it the most valuable company in London’s benchmark FTSE 100, a series of missteps how she and her partners at the University of Oxford handled aspects of the clinical trial resulted in a confused picture of the vaccine’s effectiveness compared to those produced by rivals Moderna and Pfizer. While the vaccine is still likely to receive approval in the UK, doubts are now growing as to whether the US Food and Drug Administration will approve it – at least not without much more clinical trial data.

But, in many ways, the COVID-19 vaccine contest has always been a bit of a distraction. The company, which had little history of vaccines before COVID-19, had promised not to profit from its inoculation until the end of the pandemic. And, the chance of the product becoming a blockbuster was still uncertain.

Alexion’s deal, however, is much more important to the company’s future. And here, the picture is decidedly mixed, which perhaps explains why a number of investors bailed out on Monday morning.

In some ways, Pascal Soriot, CEO of AstraZeneca, seems smart: The rise of the company’s shares has given him a powerful currency with which to make an acquisition – he would look silly if he missed the opportunity. In 2014, when he pushed back a takeover bid by Pfizer, Soriot promised AZ shareholders that he would double the company’s revenue to around $ 40 billion by 2023, a target the company was little likely to achieve through organic growth alone. (Its 2019 revenues were only $ 20 billion.) The purchase of Alexion brings at least $ 6 billion closer to AstraZeneca.

In addition, Soriot had invested heavily to revitalize the company’s research and development pipeline and expand its footprint in China. They were good moves strategically. AstraZeneca now has the best prospects for profit growth of all of its major competitors. But these weren’t cheap decisions, and Soriot had the added burden of maintaining the company’s rich dividend, a choice he describes as important in rewarding AZ shareholders for staying with the company. throughout his long corporate turnaround (others point out more cynically that dividend growth is one of the metrics that Soriot’s own compensation is tied to). As a result, the company has always been cash poor and had to sell legacy assets and borrow heavily to fund these moves.

Some analysts believe AstraZeneca is buying Alexion because he basically had to buy somebody (anyone!) to consolidate cash flow and avoid missing aggressive profit growth targets. That’s the point of view of Naresh Chouhan, an analyst at Intron Health, a health research company in London. “We believe there is no other strategic rationale than buying short-term profits and cash flow,” Chouhan wrote in a report to clients on Monday. This explains why some investors, baffled by the smell of desperation surrounding the deal, reached the ejection handle on Monday.

Alexion instantly helps consolidate the company’s cash position: It generated $ 2 billion in free cash flow in 2019 and is on track to produce more this year, and AstraZeneca said the deal would also immediately increase cash flow. profits. Even Chouhan, a skeptic of AstraZeneca, admits the deal is likely to boost earnings growth over the next several years.

The deal also purchases the AstraZeneca line of drugs which are potentially complementary to its existing portfolio. Although AstraZeneca is particularly effective in oncology medicines, Alexion focuses on rare diseases, especially those caused by the uncontrolled activation of a part of the body’s immune response called the complement system. He has a blockbuster drug at Soliris, which generated nearly $ 4 billion in sales last year. It may also prove that part of Alexion’s R&D around the complement system goes hand in hand with AstraZeneca’s heavy investment in a class of cancer immunotherapy treatments called PARP inhibitors.

But Chouhan points out that there were probably other ways to acquire this expertise than paying a $ 13 billion premium to Alexion shareholders. He also points out that while the deal is likely to increase AstraZeneca’s profits over the next four years, it actually increases the company’s vulnerability to patent expiries from 2024 when three of its own blockbuster drugs – Farxiga , Brillinta and Lynparza – will all lose their patent protections. , plus Soliris will also begin to face competition from generic alternatives.

Of course, by 2024 Soriot, who is 61, may have cashed in and retired. It seems a lot of investors don’t stay around to find out.

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