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Is AstraZeneca Paying Too Much for Alexion?

By Brian Orelli, PhD - Dec 21, 2020 at 9:45AM

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Dig a little deeper into the valuation.

Earlier this month, AstraZeneca ( AZN -1.86% ) announced plans to acquire rare-disease expert Alexion ( ALXN ) for $39 billion. In this video from Motley Fool Live, recorded on Dec. 14, Corinne Cardina, bureau chief of healthcare and cannabis, and contributor Brian Orelli discuss what AstraZeneca is getting in the deal. They also debate whether the U.K.-based drugmaker is overpaying for access to Alexion's repertory of commercial drugs and drug candidates.

Corinne Cardina: So turning now to some news that came out over the weekend, we've talked a little bit about AstraZeneca and its coronavirus work, but it actually decided to buy Alexion for $39 billion in a cash and stock deal. This represents a 45% premium on Alexion's current stock price. Brian, what do you think of this deal and how does it fit into AstraZeneca's strategy?

Brian Orelli: Yeah. On the surface, it looks really expensive and that was my initial reaction, was like 45% and $39 billion. But when AstraZeneca says that it's going to add to their earnings immediately, that makes it not look quite as bad. Part of it says they're using some cash and cash returns are horrible, so that cash wasn't adding that much to earnings. So whether they're paying an inflated price for Alexion, they are not necessarily losing that much on their earnings if they were paying on cash. Then about two-thirds of it is being paid with shares, and I looked and AstraZeneca actually has a higher P/E ratio than Alexion. I think that's also contributing. They're paying with extensive shares and then they're getting earnings that are cheaper. So I think that's also helping the deal look not quite as bad.

In the long-term, they're looking for $500 million per year in synergies by reducing costs, redundant cost, and they'll have a full [$500 million] by the end of the third year. I think all in all, it's probably not too bad of an acquisition, even though on the surface, it looks expensive.

In terms of what does AstraZeneca get in and where does it fit in their broader scheme of things, Alexion is focused right now on rare diseases. So this gets AstraZeneca into that space where you can sell drugs for a very high price because there's not that many patients that are taking them, and then the selling costs, the marketing costs, are pretty low because there's not that many patients. You'll have to visit a few specialists to get majority of the patients, the doctors that prescribe the drugs to the patients. It has two drugs Soliris, and there's a follow-on, Ultomiris, and those are the biggest drugs that AstraZeneca is getting from Alexion. They treated a disease where the complement system destroys red blood cells. So it's actually multiple diseases there. Then the drug inhibits the complement system, so that keeps the red blood cells from being destroyed.

I think AstraZeneca -- while those drugs help justify the price -- AstraZeneca is probably mostly after the pipeline of 11 drugs. This boosts up their pipeline substantially. AstraZeneca had been getting into the immunology space and that pipeline of drugs is heavily in immunology. They're looking for the deal to close in the third quarter of 2021.

Cardina: Yeah. We've got some time to keep an eye on that one. It's not going to close right away.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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AstraZeneca PLC Stock Quote
AstraZeneca PLC
$55.53 (-1.86%) $-1.05
Alexion Pharmaceuticals, Inc. Stock Quote
Alexion Pharmaceuticals, Inc.

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