Industry watchers have been searching their crystal balls, trying to read Alexion's future. They floated several potential buyers—including Pfizer, Sanofi, Biogen and Amgen—but not AstraZeneca.
So when the British drugmaker dropped its $39 billion bombshell Saturday, questions naturally followed.
After crunching the numbers, several analysts have concluded that the unexpected deal benefits both companies, though not without a couple of caveats.
Buying Alexion diversifies AstraZeneca’s portfolio, creates near-term cash flow and boosts profits, analysts from SVB Leerink, Jefferies and ODDO BHF figure. As for Alexion, an acquisition meets investors’ hopes for the company after its underperforming the market for a long time. However, the effect to AZ’s longer-term growth and the $175-per-share value AZ tips the biotech leave room for debate.
Growth for AstraZeneca
Bringing Alexion into the fold helps AstraZeneca in several ways. First, AZ would get an immediate revenue boost of about $6 billion from Alexion’s commercial portfolio, which currently depends on C5 inhibitors Soliris and Ultomiris. And the British drugmaker expects those sales to grow by 9% a year through 2023.
That’s consistent with Alexion’s own projection provided at its recent investor day in October, SVB Leerink analyst Geoffrey Porges said in a Monday note to clients, but above Porges’ own previous estimate of 7%.
Now, though, Porges says he sees “room for higher revenue from Alexion’s portfolio under AZ’s wing, especially for Ultomiris in neurology and for the complement portfolio in China, where Alexion is underpenetrated,” he said.
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But fellow SVB Leerink analyst Andrew Berens and Jefferies’ Peter Welford pointed out that the combined company’s longer-term revenue growth would be slower than AZ’s alone, based on its current offerings, given that Alexion’s top-selling Soliris loses exclusivity in 2025. Potential competition from FcRn therapies—which Alexion is also working on—is also in the making. That said, Berens acknowledged that additional capital investment and pipeline successes could “re-accelerate” revenue growth.
The deal marks AZ’s foray into rare diseases, a field that has become increasingly attractive to Big Pharma due to its limited competition, orphan-drug exclusivity advantage and continuous product development, Porges noted.
To ODDO’s Sebastien Malafosse, AZ is buying Alexion for its science, not for potential cost cuts. AZ indicates that Alexion’s expertise in the immune system’s complement system can potentially be applied to other more common diseases such as oncology, neurology and respiratory, he said in a Monday note.
Still, some cost-cutting opportunities, to the tune of $500 million per year, are expected from the combination by 2024, AstraZeneca said. Porges said he expects AZ could squeeze out more “given the lean operations needed to sell Alexion’s drugs and the limited research and development opportunities remaining at Alexion.”
Is AstraZeneca paying too little?
Alexion investors have been unsatisfied with their returns for most of the last three years, culminating in active investor Elliott Management’s open letter in May blasting the company’s purchase of Portola Pharmaceuticals, Porges pointed out. Elliott urged Alexion to put itself on the block, one reason why analysts have been tagging potential buyers.
Alexion management has been delivering on top- and bottom-line expectations and diversified its pipeline to include 11 molecules, but stock performance has lagged the industry. So the sale to AZ, though late, gives investors what they have long been asking for.
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At least one analyst figures AZ is paying a fair price for salvaging Alexion. Jefferies’ Eun Yang labeled the price as “healthy” for Alexion, though acknowledging it’s “not expensive.” She pointed to the company’s current reliance on the C5 franchise, potential competition after 2022, along with “yet-to-be materialized” pipeline as reasons for content at Alexion at the current price. The company’s stock has not traded above $145 since September 2017, she noted.
But SVB Leerink’s Berens and Porges figure other bidders might jump in.
Though long-suffering investors are breathing “a sigh of relief” at the deal announcement, “we still believe there is potential for the process to become more competitive with at least one other bidder coming to the table, especially with AZ somewhat debt-constrained,” Porges said.
Alexion could shoot for a price target of $200 per share, the analyst said—significantly higher than AZ’s valuation of $175—and still leave enough value for the acquirer.