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Dec 14, 2020

AstraZeneca's US$39 billion Alexion deal draws investor questions

Paul MacDonald discusses AstraZeneca


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AstraZeneca Plc’s shares slumped to an eight-month low after it agreed to buy Alexion Pharmaceuticals Inc. for US$39 billion, with some investors questioning the strategic rationale for the U.K. pharma giant’s biggest deal ever.

The acquisition would push AstraZeneca, which has built a turnaround on its strength in oncology, into new areas such as immunology. While those are potentially lucrative and could help address the U.K. company’s relative shortage of cash, there are few synergies with existing operations. And the transaction potentially adds to longer-term risks that the company faces from patent expirations.

Markus Manns at Union Investment, which holds AstraZeneca shares, said the deal also prompts questions over prospects for the U.K. company’s existing portfolio. AstraZeneca Chief Executive Officer Pascal Soriot has focused on cancer drugs like Lynparza, Imfinzi and Tagrisso.

“If you don’t have cash, don’t buy a large company unless it is a once-in-a-lifetime opportunity and has strong strategic merits,” Manns said. “You can hardly call this deal a once-in-a-lifetime opportunity, and the strategic merits are weak.”

The shares traded 5.1 per cent lower as of 10:36 a.m. in London, after falling more than nine per cent in early trading.

Alexion Rises

Alexion surged 35 per cent in premarket U.S. trading to US$163. With the drop in AstraZeneca’s shares on Monday, the value of the cash-and-stock deal slipped to around US$171 a share from an initial US$175. Still, with Alexion trading well below that level, it suggests that investors see limited prospects for a higher approach from another bidder.

AstraZeneca has US$8 billion of cash in hand and its debt load amounts to 1.7 times its earnings -- a lighter burden compared to the average for European high-grade companies.

Its bonds are indicated slightly lower in Monday trading, with an 800 million-euro (US$972 million) 2028-dated note falling 0.4 cent to 109.4 cents, based on data compiled by Bloomberg. Existing bonds tend to fall sharply after an acquisition announcement, given the prospect of new debt supply that will worsen credit metrics and draw investors to the newer, more liquid notes.

AstraZeneca is funding the deal in part through a $17.5 billion financing facility from Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc.

It’s not unusual for the shares of acquiring companies to fall when a deal is announced, unless there’s a clear cost-cutting rationale. Still, the size of the drop in AstraZeneca’s stock is significant, adding to pressure recently amid questions surrounding the efficacy of the company’s potential Covid-19 vaccine and the way the late-stage trials were handled.

China Prospects

Soriot has talked up the prospects for increasing sales in China, where Alexion has not been a big player while AstraZeneca has made inroads. Investors, however, have focused on potential longer-term threats to some of the U.S. company’s products.

Soliris, a monoclonal antibody for treatment of immune-related conditions, could face competition from biosimilar drugs after 2025, just as some existing AstraZeneca medicines lose patent protection, analysts at Intron Health said in a note.

“They have financially engineered their way out of it in the short term but stored up even bigger issues for the future whilst destroying $8 billion of value,” the analysts wrote. The deal also materially increases AstraZeneca’s risk profile, they said.

--With assistance from Morwenna Coniam and Tasos Vossos.