(Bloomberg Opinion) -- AstraZeneca Plc was always going to do another deal one day, but few followers of the U.K. drugmaker expected this: It’s splashing out $39 billion in cash and stock for U.S. rare-disease specialist Alexion Pharmaceuticals Inc. in its biggest acquisition ever. AstraZeneca already has one of the strongest investment stories in the industry. This deal complicates that. Nevertheless, it deserves the benefit of the doubt.
The British pharmaceutical group has gained prominence this year for its partnership with Oxford University to test, manufacture and distribute a vaccine against Covid-19. But its commercial prospects rest on an enviable stable of oncology, cardiovascular and respiratory drugs. AstraZeneca’s pipeline gives it an unusually strong growth profile. Cash flow has been building and it’s on track to pay its dividend next year without having to borrow to do so – at long last.
Why potentially damage all that with a left-field acquisition? Alexion opens a new therapeutic channel for AstraZeneca when there’s no obvious need to do so. The risk is that the deal dilutes the growth story. AstraZeneca’s revenue is expected to be 33% higher in 2024 than in 2021, according to estimates compiled by Bloomberg. Alexion’s top line isn’t forecast to grow that fast.
AstraZeneca says that on its own modeling, Alexion’s sales outlook is better than consensus forecasts and the U.S. firm’s trajectory matches its own. Investors need to take it on trust, but the U.K. company sounds very confident. The obvious immediate benefit of the deal is that it will meaningfully strengthen cash generation, so much so that AstraZeneca is talking about potentially increasing its dividend. Otherwise, the logic is as one would expect: cost savings and improved distribution for Alexion’s medicines globally. AstraZeneca also gains some scientific expertise that it may fruitfully cross-fertilize with its own.
If the acquisition marks a strategic departure, at least it stacks up financially. The 45% premium over Alexion’s Friday closing price, worth nearly $13 billion, looks big for a deal with only $500 million of projected annual synergies. But Alexion is cheap, trading on a multiple of just 9.5 times its estimated earnings over the next 12 months. That low starting valuation means AstraZeneca can make the deal pay off.
Alexion is expected to have a small net cash position at year-end, so the all-in cost should be similar to the headline price. The company is forecast to deliver operating profits of $3.9 billion in 2024. Add the synergies and deduct tax, and the return on acquisition after three years is then 9%. But the synergies are probably understated and the forecasts are likely conservative, so even decent double-digit returns look possible.
Activist Elliott Management Corp. had been running a long campaign to get Alexion to sell itself. No one bit until now. But often people don’t want to buy something until someone else does, so an approach from a large pharma rival can’t be ruled out. The deal works for AstraZeneca at this price. If its shareholders are happy, they will push up its shares, in turn lifting the value of the offer. Whether that can be sustained through a bidding war is another matter.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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