Introduction:
On 12 December 2020, AstraZeneca announced a definitive agreement to acquire Alexion Pharmaceuticals, for a value of $39 bn. For each share of Alexion, the shareholders will receive $60 in cash and a little over 2 AstraZeneca American Depositary Shares (ADS), corresponding to half of an ordinary AstraZeneca share. Alexion shareholders will own a 15% share in the combined company. The deal will strengthen AstraZeneca’s presence in immunology by adding Alexion’s strong pipeline and unique complementary technology platforms.
Companies’ Overview:
Alexion Pharmaceuticals
Founded in 1992 and listed on NASDAQ in 1996, Alexion Pharmaceuticals Inc. is an American company focused on complement inhibition, an essential part of the immune system that belongs to the humoral defence mechanisms against infectious agents. The company’s products target immune-mediated rare diseases related to the abnormal activation of the complement system. Their most successful medications include:
- Soliris – a first-in-class anti-complement monoclonal component 5 (C5) monoclonal antibody.
- Ultomiris – a second-generation C5 monoclonal antibody.
The performance of the company relies mostly on the sales of Soliris. The drug has a high cost, and it faces the future risk of competition with generic products once its natural patent expires. Competitors like Amgen are already seeing an opportunity to capitalize by developing similar products. However, Alexion has already developed the successor Ultomiris characterised by a reduced frequency of administration compared to Soliris – every 8 weeks compared to every 2 weeks. More than 70% of patients treated with the predecessor have already switched to the second-generation product.
In terms of financial performance, sales grew at an average of 17% annually over the last 5 years. Despite doubling its EBITDA per share since 2018, its EV/EBITDA was 8.3 compared to an industry average of 14.5, signalling a buying opportunity. This is justified by the fact that the company has spent almost $4 billion in the last three years acquiring Achillion Pharma, Syntimmune, Wilson Therapeutics and Portola. Because of this acquisition spree, the stock has been laggard since its peak of $210 in 2015. Prior to the announcement, the share price was $120.
AstraZeneca
AstraZeneca PLC is a British-Swedish multinational pharmaceutical and biotechnology company headquartered at the Cambridge Biomedical Campus in Cambridge, England. The firm was created in 1999 as a result of the combination between the Swedish Astra and the English Zeneca, and it has a history of growth through external acquisitions. The firm engages in the research, development and manufacture of pharmaceutical products. Its product portfolio covers major diseases in three main therapy areas: oncology, cardiovascular, renal & metabolic (CVRM) and respiratory. Meanwhile, the company selectively develops therapies in autoimmunity, infection and neuroscience. The firm has been active in the fight against COVID19 by developing a vaccine, an antibody combo and other products. AstraZeneca currently has 30 products in phase III.
Industry Overview:
Resilient to the current pandemic, the healthcare sector is one of the world’s largest and fastest-growing industries. Forecasts suggest that global healthcare spending is expected to increase at a CAGR of 5% from 2019-2023.
Healthcare awareness among large parts of the global population has significantly increased in 2020, triggered by the coronavirus pandemic. Covid will underpin the sector’s robust sales growth, set to run ahead of economic growth in many countries. Demographic and lifestyle factors – such as ageing populations, diet-related illnesses in developed countries, growing prosperity in emerging markets – are also crucial factors supporting growth.
In the industry, many companies decide to focus on faster-growing treatment areas, that are less vulnerable to fierce competition, such as (immune-) oncology and rare diseases.
In particular, focusing on Alexion’s field of activities, the rare diseases sub-sector is a high-growth therapy area with rapid innovation and significant unmet medical needs. Over 7,000 rare diseases are known today and only 5% have US Food and Drug Administration-approved treatments. Rare disease treatment market size exceeded USD 144.3 billion in 2019 and was expected to grow at over 12.2% CAGR between 2020 and 2026. In fact, the growing prevalence of rare diseases and their consequences on healthcare expenditure have augmented the demand for special treatments, positively impacting the rare disease treatment market growth. However, some challenges have to be addressed such as the lack of skilled healthcare personnel.
The overall positive outlook in this niche sector together with Alexion’s expertise in rare disease development and commercialization will enable the combined entity to develop a portfolio of medicines addressing the large unmet needs of patients suffering from rare diseases.
Deal Rationale:
From a strategic standpoint, acquiring Alexion will allow AstraZeneca to further assert itself in immunology by acquiring its innovative technologies and rare disease unit. Acquiring Alexion will also allow AstraZeneca to increase its geographical coverage across primary, specialty and highly specialized care. Alexion’s franchise includes Soliris, an innovative treatment for patients affected with PNH, currently approved in many countries. Alexion has many other promising projects in its pipeline, such as Factor D small-molecule inhibitors. AstraZeneca will accompany Alexion’s R&D teams to work on Alexion’s pipeline of 11 molecules across over 20 development programs. AstraZeneca also plans to use its global reach to distribute Alexion’s high-quality treatments.
From a financial standpoint, the acquisition will increase the combined group’s profitability, by enhancing core operating margins. Improved cash flow generation will also allow the combined group to repay debt more easily or increase dividends. The acquisition is expected to deliver strong accretion to AstraZeneca’s core earnings (double-digit % accretion in the first three years). This acquisition is expected to create run-rate pre-tax synergies of $500m per year. The combined entity maintains a strong investment-grade credit rating.
Deal Structure:
AstraZeneca will acquire, via Delta Omega Sub Holdings, 100% of Alexion’s outstanding shares in a public takeover transaction. The consideration will be provided through a combination of cash and American Depositary Shares (ADS), each representing half of an ordinary share. Specifically, Alexion’s shareholders will receive $60 in cash and 2.124 of new AstraZeneca’s ASD, which represent 1.062 common shares. Based on the average price of $54.14 for AstraZeneca’s ADS, the portion of the consideration provided through equity amounts to approximately $114.99. Overall, the total price per Alexion’s share can be estimated at circa $174.99.Considering the 218,845,432 outstanding shares, the equity value is calculated at $38.3 bn. Nonetheless, the overall deal value, which includes in the transaction the acquisition of warrants, options and other unexercised securities, amounts to $39bn.The implicit price to earnings multiple of the transaction corresponds to 15.93, while the price to book value equals 3.40.
After completion of the transaction, Alexion’s shareholders will own a 15% stake in the combined company. The cash portion will be partially financed by AstraZeneca through a $17.5 bn new bridge-financing facility provided by Morgan Stanley, J.P. Morgan and Goldman Sachs Group. Over time, AstraZeneca has the intention to refinance the initial credit facility through a combination of new medium-term bank loans, debt-capital market issuances and business cash flows. Overall, the share portion of the transaction will amount to approximately $27bn while the remaining $11bn will be provided in cash. The bid premium, based on the last trading date before the announcement (11/12/20 Alexion’s price: $120.98), is calculated at about 44.6%. In addition, the bid premium calculated on the closing price (05/12/19 Alexion’s price: $107.42) before the transaction was rumoured to be at 62.9%. Bank of America Securities acted as financial advisor for the seller (Alexion), while Evercore Partners, Centerview Partners, Morgan Stanley, J.P. Morgan and Goldman Sachs acted as financial advisors and debt financing underwriters for the buyer (AstraZeneca). The transaction is now subject to shareholders and regulatory approvals and is expected to be completed in the third quarter of 2021
References: Thomson Reuters Eikon, AstraZeneca’s website, Alexion’s website, Zephyr, Global Markets Insights
To contact the authors:
Bocconi Students M&A Circle 