Alexion asked AstraZeneca to up its buyout offer multiple times—almost costing it a deal in the process

Alexion
Alexion almost lost its chance at a multibillion transaction with AstraZeneca thanks to a surprising regulatory trouble from Dutch tax authorities. (Alexion)

Just as any takeover target would, Alexion asked AstraZeneca to increase its buyout offer several times before the two shook hands on the $39 billion deal unveiled in December. But during the back-and-forth, some unexpected tax scrutiny almost derailed the talks, according to a new proxy filing.

Beginning in late 2019, Alexion management came under pressure from investors, most notably proxy fighter Elliott Advisers, to put itself on the block. Even though the drugmaker set its not-for-sale record straight that December, the buzz continued as “several stockholders encouraged the company to explore strategic alternatives,” Alexion said in a securities filing.

Pascal Soriot took the hint. On Aug. 10, the AstraZeneca CEO reached out to his predecessor at the British pharma, David Brennan, who happens to be Alexion’s board chairman. Brennan’s response to Soriot’s merger suggestion? Make it formal, in writing.

What Brennan didn’t say was this: During the summer, Alexion’s board had decided to conduct a “comprehensive and in-depth review” of Alexion’s long-term plan, including a potential merger.

The first offer from AZ—to acquire Alexion at $148 per share—came verbally on Sep. 2 during a videoconference Brennan and Alexion chief executive Ludwig Hantson had with Soriot and AZ Chairman Leif Johansson, followed by a written proposal the next day.

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In the following month, Brennan and Hantson would reject AstraZeneca's offers multiple times, saying they undervalued Alexion. AZ responded first by increasing its price to $155 per share and then to $170.

While pushing AZ to further sweeten the deal from the $170-apiece mark, Alexion, through its financial adviser BofA Securities, contacted seven other potential buyers to gauge their interest in a transaction. One company, dubbed “Participant 2” in the proxy filing, welcomed the idea and signed a confidentiality agreement to start reviewing due diligence materials.

But in October, Alexion got a letter from the Dutch Tax Authorities threatening action on “certain tax-related matters.” That surprise understandably spooked AstraZeneca.

On Oct. 24, AZ’s chief financial officer, Marc Dunoyer, let Alexion know that it intended to terminate due diligence and negotiations. While the British pharma was still interested in making a deal, it couldn’t proceed until Alexion either settled its tax problem or gained more information about its potential obligations to the tax authorities.

Around the same time, Participant 2 came back with a preliminary, $160-per-share bid. Alexion had told the alternative bidder that it would consider a sticker in that range—obviously lower than AZ’s—but only if the buyer would take responsibility for related regulatory risks. After reviewing more information and talking to Alexion management, Participant 2 said it wouldn’t be willing to take that risk.

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That left AZ as Alexion’s only option. Luckily for the Ultomiris maker, it managed to reach a verbal settlement with the Dutch tax regulator in mid-November. Right after that, AZ came back with its $175-apiece price, which the two companies eventually took public in December.

Alexion may have put the tax hiccup behind it with an official settlement on Dec. 8, but a different regulatory threat has emerged since.

Last month, the Federal Trade Commission unveiled a sweeping review of its approach to evaluating biopharma M&A. Democrats at the antitrust watchdog have lamented the agency’s practice of examining biopharma transactions based on specific product overlaps. Now with more power under the Biden administration, they're pushing for a more aggressive approach, including potentially looking at drug pricing.

RELATED: FTC's crackdown on pharma mergers reflects 'tougher' M&A environment under Biden administration: lawyer

With potentially choppy regulatory waters ahead, SVB Leerink analyst Geoffrey Porges recently changed his tone on the Alexion-AstraZeneca deal. Instead of rooting for a possible competitive offer, he now sees “significant risk” that the transaction would be blocked by the FTC, or that the agency would place “onerous conditions on AZ’s conduct after the acquisition that could alter the timeline, terms of value of the acquisition,” he wrote in a recent note to investors.

Because of the FTC’s renewed stand, Alexion and AZ have withdrawn and refiled their merger notification with the agency, resetting the clock to allow more time for review.