AstraZeneca can justify its RM158b splashout

The obvious immediate benefit of the deal is that it will meaningfully strengthen cash generation


ASTRAZENECA plc was always going to do another deal one day, but few followers of the UK drug maker expected this: It’s splashing out US$39 billion (RM157.95 billion) in cash and stock for US 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. Cashflow 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 said on its own modelling, Alexion’s sales outlook is better than consensus forecasts and the US firm’s trajectory matches its own. Investors need to take it on trust, but the UK 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-fertilise with its own.

If the acquisition marks a strategic departure, at least it stacks up financially. The 45% premium over Alexion’s last Friday closing price, worth nearly US$13 billion, looks big for a deal with only US$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 US$3.9 billion in 2024. Add the synergies and deduct tax, 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. — Bloomberg

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