Big cash flows from a handful of successful new cancer drugs recently emboldened AstraZeneca (AZN -0.13%) to make a huge bet on Alexion Pharmaceuticals (ALXN) and its successful drugs for rare diseases. AstraZeneca offered $39 billion for Alexion in a combination of cash and stock, although a lack of enthusiasm for the deal has pressed AstraZeneca shares lower since the announcement.
Granted, Alexion Pharmaceuticals isn't the industry's most exciting acquisition target, but this deal will most likely work out well for investors in the long run. Here are three big reasons this deal looks like a win-win for both drugmakers and their shareholders.
1. Ultomiris is a hit
If biology isn't really your thing, an overactive complement system might not sound like a life-threatening problem. Unfortunately, unrestrained complement system activity is at the root of many severe conditions, and an increasing number of underserved patient populations rely on treatment with Alexion's lead drugs Soliris, and a more recently launched version called Ultomiris. While the patient populations are small, annual maintenance doses that cost $458,000 make it one of the most expensive treatments around.
Soliris requires infusions every two weeks, while Ultomiris only requires patients to visit a care provider and sit for an infusion once every eight weeks. Within 18 months of launching as a new option for paroxysmal nocturnal hemoglobinuria (PNH), around 70% of these patients switched to Ultomiris.
In October, the Food and Drug Administration approved Ultomiris to treat atypical hemolytic uremic syndrome (aHUS), which is the second of four indications that Soliris is currently approved to treat. Phase 3 trials currently underway could expand Ultomiris to all of the same patients as Soliris over the next couple of years.
2. The numbers work out
AstraZeneca finished September with about $8 billion in cash and $22 billion in debt. While a $39 billion buyout offer seems like a risky move for a company already sitting on a lot of debt, the deal's likely to pay for itself on the strength of Alexion's lead franchise alone.
Sales of Alexion's Soliris/Ultomiris franchise are expected to climb 17% year over year to a whopping $5 billion in 2020. Soliris is getting old and could begin facing biosimilar competition in 2026, but market exclusivity for Ultomiris should continue through 2035.
Alexion is planning or running late-stage studies with Ultomiris and patients who have complement-mediated thrombotic microangiopathy, amyotrophic lateral sclerosis, and blood clots associated with bone marrow transplantation, just to name a few. When AstraZeneca picks up Alexion's projects next year, the development of Ultomiris and the cash flows the drug produces will probably hit a higher gear than we've seen so far.
3. Not a one-hit wonder
Alexion relies on its growing Soliris/Ultomiris franchise for around 85% of total revenue but it isn't the only treatment with growing sales in the company's lineup. Strensiq is an enzyme replacement therapy with third-quarter sales that grew 23% year over year to an annualized $758 million, and it will most likely add over $1 billion to AstraZeneca's top line in 2022.
Over the years, Alexion has used enormous cash flows from Soliris to build a disappointing pipeline of clinical-stage assets that aren't going anywhere fast. Earlier this year, Alexion also made the confusing acquisition of Portola Pharmaceuticals and its poorly performing lead drug Andexxa for $1.4 billion.
Alexion probably overpaid for Andexxa, a drug hospitals keep on hand to reverse the effects of popular blood thinner medications in emergency situations. Andexxa's commercial launch in the U.S. began in early 2019, and sales in 2020 are only expected to reach about $68 million.
Despite its slow start, Andexxa is a one-of-a-kind solution for life-threatening situations that every big hospital around the world needs to remain prepared for. With AstraZeneca's international salesforce on the job, annual Andexxa sales will probably reach $400 million by 2025.
Why everyone hates the deal
Alexion's pipeline of potential new drugs is inexcusably weak for a company that recorded over $4 billion in research and development expenses over the past five years. AstraZeneca shares tumbled about 8% after announcing its imminent acquisition of Alexion as analysts hoping for a more forward-looking investment expressed their disappointment.
Financially, this merger piles a lot of debt onto AstraZeneca's already strained balance sheet. This means it could be a long time before the company is in a position to acquire exciting new technology that could lead to tomorrow's blockbuster drugs.
Alexion Pharmaceuticals wasn't the most exciting acquisition target AstraZeneca could have chosen. If shareholders can suffer the lack of pizazz, though, they'll get to watch AstraZeneca earn a return from this investment that exceeds the company's cost of capital by a mile.