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AstraZeneca to acquire Alexion Pharmaceuticals

By: Louis Matovu, Josh Shah, Kerim Hassan, Jaideep Kallu

Deal overview

The motivations behind this deal are that both companies share the same dedication to science and innovation to deliver life-changing medicines. The combined footprint of the company will enable a broad coverage across, primary, speciality and highly specialised care. AstraZeneca have carved out a presence in oncology, cardiovascular, renal and metabolism and respiratory disease but have recently increased efforts in immunology research. Alexion has pioneered complement inhibition for a broad spectrum of immune-mediated rare disease. Together, AstraZeneca with Alexion’s R&D team, will work to build on Alexion’s pipeline of 11 molecules across more than 20 clinical-development programmes. Alexion’s leading expertise in complement biology will accelerate AstraZeneca’s growing presence in immunology and adds a new technology platform to their science and innovation-driven strategy.

Company Details: AstraZeneca

Founded: 6th April 1999

Industry: Pharma and BioPharma

Revenue: $6.578B (Q3 2020)

Employees: 70,600

CEO: Pascal Soriot

Company Details: Alexion Pharmaceuticals

Founded: 1992

Industry: Pharma

Revenue: $1.589bn (Q3 2020)

Employees: 2525

CEO: Ludwig N. Hantson

Short-Term Benefits

Immediately continue Astrazeneca’s market penetration in Immunology post-vaccine:

This deal allows Astrazeneca to benefit from Alexion Pharmaceuticals’ already established pipeline of C5 antibodies (namely Soliris and Ultomiris) for immune-mediated diseases, to strengthen their position in the immunology division which their future efforts are more focused on. These medicines are already approved worldwide, so this will allow their rapid growth within the division, from their Covid-19 vaccine development, to continue.

Alexion can benefit from Astrazeneca’s commercialisation: Alexion Pharmaceutical’s expertise has not been fully felt in all countries, due to the difficult nature of bringing new, innovative treatments to developing countries. However, this acquisition will allow Alexion to benefit from AstraZeneca’s growing, and already large, geographical footprint especially within the emerging markets.

Short-term operating margin enhanced significantly: The instant revenue growth will offset the increase in costs leading to more than $500m in pre-tax synergies per year for at least 3 years which is equivalent to double digit operating margin growth. This provides knock-on benefits of leveraging this extra cash at hand to either: reduce debt, reinvest in R&D, or increase dividend payments (which have been AstraZeneca’s ambition for a while.)

Long-Term Benefits

Reduction of long-term risk through expanding portfolio: AstraZeneca historically specialised in everyday medicines prescribed by doctors. After financial difficulties in 2014 they diversified to include products on the frontiers of cutting edge science and technology. The acquisition of Alexion will further expand their portfolio into the production of rare disease drugs, reducing the damage caused by any part of their current ventures falling flat. In turn, they are reducing their exposure and risk to changes in the composition of the pharmaceuticals industry in the future.

Alexion will have greater access to capital: this applies both short-term and long term. In the short term, the acquisition payment itself will see a huge increase in liquidity on the balance sheet of Alexion. In the long-run, being part of a much larger parent company can make it easier for Alexion to raise funds on a meaningful scale than if it were on it’s own.

Long-term costs cut due to economies of scale: the acquisition expands AstraZeneca’s portfolio in terms of the types of diseases it remedies, but it is still within the immunology field (a field that AstraZeneca already has a presence in). As such, both firms can hope to cut costs in the long run due to potential synergies. For many of the drugs, these synergies exist the whole way through the supply chain, from R&D to production to transportation.

Risks and uncertainties

Pascal Soriot [chief executive of AstraZeneca] believes the acquisition will move it beyond the company’s core oncology business and ‘propel the company to the top of the FTSE 1OO for a long time to come’. With 3 current oncology drugs and several others from ovarian and prostate cancer in its pipeline, such an acquisition marks a risk in the sense of uncharted territory and one that may be unnecessary given the current climate with COVID and AstraZeneca's prominent role in its COVID-19 vaccine. In addition to this, the deal was supposedly sneaked out on a Saturday afternoon during the Christmas period, perhaps to avoid that AstraZeneca would be taking on £13bn of debt and handing over a 15pc stake to buy a company that has been effectively shopping itself around for years.

The immediate aftermath of the announcement of the deal resulted in £7bn being wiped off AstraZeneca’s share price and its stock tumbling by 6pc, out falling any other figure in the FTSE index. In addition to this, the 45pc premium definitely has a sense of overpayment, especially given that Alexion’s current shares are 4Opc below its peak in 2O15. However, AstraZeneca is renowned for its commitment to a strong investment-grade credit rating and the acquisition is expected to significantly enhance cash generation which will allow for rapid debt reduction and overall deleveraging.

However, taking on a wider perspective AstraZeneca’s share price has risen from 3,8OOp to 8,2OOp in the last four years meaning its only real competitors at the summit of the FTSE index are Royal Dutch Shell and Unilever. Such an acquisition can clearly be a bold indicator of the risk to reward collateral that AstraZeneca are willing to take to reach the top. The combined entity is also predicted to make double-digit average revenue growth through 2O25.

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