Roche may want Alexion, but is the price right?

Roche may have the wherewithal to bid for Alexion and an appetite for the company's rare-disease drugs. But it might not have the stomach for the price.

Roche ($RHHBY) is reportedly scouting for financing to support a bid for Alexion ($ALXN), which had a market cap last Thursday of about $20 billion. Not cheap. And after word of the Swiss drugmaker's interest emerged on Friday, Alexion's stock spiked. By this morning, analysts were expressing worry about the cost. "Quite frankly, I don't like this deal," Helvea analyst Olav Zilian told Reuters. "It risks being overpriced. Most of the U.S. is in a bubble."

It would be Roche's biggest purchase by far since its 2009 buyout of Genentech. And as Reuters notes, it would be a departure from its recent strategy of zeroing in on new technology, rather than buying in marketed drugs. Plus, Roche has been focusing on drugs targeted at patients with specific genetic mutations, pairing its diagnostics expertise with its drug R&D. It has two new breast cancer treatments, Perjeta and Kadcyla, each expected to rocket to blockbuster status. Its new skin-cancer product, Erivedge, won conditional approval in Europe today.

Its older drugs are expected to suffer on biosimilar competition soon enough, however. It has suffered some R&D setbacks recently as well. So, a new revenue stream, in a different market, could be attractive. As Les Funtleyder of the investment firm Poliwogg told Bloomberg, "On the first page of the pharma playbook is: 'If you have pipeline failures, do an acquisition.' "

These days, pharma companies are salivating after the rare-disease market, and Alexion has a blockbuster in Soliris, one of the world's priciest drugs, expected to hit $6 billion in 2025 sales. Though Soliris is currently its only drug, the company recently won a "breakthrough" tag from FDA for another rare-disease product, asfotase alfa. 

Orphan drugs like these can command enormous prices, at least for now, as Soliris' price tag attests. But cost-conscious payers are increasingly reluctant to pay up, and some are pushing for lower prices. So, whether all of Alexion's assets are worth the probable cost is an open question. "Would it make sense from a value accretion point of view?" Kepler Cheuvreux analyst Fabian Wenner told Reuters. "No way."

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