AstraZeneca plc (AZN) Ordinary US$0.25
HL comment (17 December 2020)
AstraZeneca has agreed to buy Alexion Pharmaceuticals in a mixed cash and shares deal worth $39bn. The offer represents a 45% premium to Alexion's share price prior to the announcement of the deal.
Alexion specialises in auto-immune, and inflammatory, rare diseases and reported revenues of $5bn in 2019 - up 21% year-on-year. That growth has been driven by the launch of its second generation C5 monoclonal antibody (which reduces inappropriate immune responses).
Astra expects the deal to support double digit percentage revenue growth through to 2025, improve profitability, and deliver $500m of annual cost savings over 3 years.
The deal is subject to approval by regulators and shareholders.
AstraZeneca shares fell 5.7% on the first day's trading after the deal was announced.
If it goes through, Astra's acquisition of Alexion will be the pharmaceutical giant's largest ever deal.
As we see it, the rationale for the deal rests on three key pillars. First, that rare diseases are a fundamentally attractive area of the pharmaceutical market. Second, that increased scale will allow the combined company to deliver cost savings and operate more efficiently. And third that Astra's powerful global distribution network can boost sales of Alexion's treatments quickly.
Rare diseases are, by definition, uncommon. In the past spending millions, perhaps billions, on researching a drug to treat a few tens of thousands of patients worldwide didn't make financial sense. Instead attention focused on treatments for common diseases, like asthma, with patients stretching into the tens of millions. As a result, only around 5% of designated rare diseases have approved treatments.
More recently that attitude has shifted. While major diseases may have large markets, they also attract lots of competition. That means individual drugs companies can end up with a relatively small slice of a large pie. Competition in rare diseases is far lower - a drug company which develops a treatment for a previously unaddressed illness will likely end up serving the entire market and can probably attach a hefty price tag to boot. It's also unlikely a competitor will develop a more effective alternative, since competition is so much lower. Increased interest in the sector means the global rare disease market is forecasted to grow by a low double-digit percentage.
Cost savings are a standard feature of any major merger, and this one is no exception. However, given the price tag and the premium Astra is paying, $500m isn't all that substantial. Instead we think the opportunity to boost Alexion's sales through Astra's distribution network is far more important. Markets outside Europe and the US account for just 20.5% of sales at Alexion, compared to 33.6% at Astra. With Astra's recent growth driven by expansion in emerging markets there's clear opportunity to cross-sell new products in those markets.
Despite adding $17.5bn to Astra's debt pile, the deal is set to strengthen Astra's cash generation. Initially the company has said it will use that to reduce debt (no bad thing in the circumstances). However, management has hinted that over time it could also support an increase in the dividend. Given Astra's had to draw on debt to pay the dividend in recent years, that would be a major event.
All these positives raises the question of why the shares fell following the announcement.
First and foremost this deal has taken the market by surprise. Astra's oncology products are already delivering very impressive growth. Cash flow was finally starting to close the gap with the dividend, and debt reduction looked set to be the order of the day. A big deal, at a massive premium, involving large quantities of debt just wasn't on the to do list. The fact that it adds another "therapy area" to Astra's relatively focused business model also muddies a previously pretty streamlined investment case.
However, we think investors should give Astra the benefit of the doubt for now.
For starters the deal isn't quite as expensive as it looks at first glance. Over half of the price is being paid in shares. Prior to the deal's announcement Astra shares were trading a PE ratio of 21.9, whereas Alexion shares traded on 9.4. Astra is buying lowly valued Alexion stock with highly valued stock of its own - the very definition of the stock market motto "sell high, buy low".
The core Astra business remains attractive in our view. While the increased level of debt isn't ideal, if management can use the extra cash flow from the Alexion deal to boost the balance sheet over the next few years, that would significantly reduce the risk in the business. Dividend growth would be the icing on the cake - although it's far from guaranteed.
Just as a final point, investors should bear in mind that the deal isn't yet signed and sealed. Regulatory approvals and shareholders approvals might be a formality, but they've tripped deals up in the past. There's also the risk that a rival bidder appears out of the woodwork - given Alexion's relatively modest PE ratio that shouldn't be ruled out.
AstraZeneca key facts
- Price/Earnings ratio: 20.8
- 10 year average Price/Earnings ratio: 15.2
- Prospective dividend yield (next 12 months): 2.8%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Vaccine Trial Results- 25/11/20
AstraZeneca has announced the results of its Covid-19 vaccine trials. The vaccine showed an average efficacy of 70%, although depending on dosage efficacy could be as high as 90% or as low as 62%. The trials did not record any serious safety events, and the group is submitting the vaccine for early approval with regulators around the world.
The group aims to deliver up to 3bn vaccines in 2021, as well as hundreds of millions of doses on approval. The vaccine can be stored at normal refrigerated conditions for at least six months.
AstraZeneca reiterated its promise to "ensure broad and equitable access to the vaccine at no profit for the duration of the pandemic".
Third Quarter Trading Update - 05/11/20
AstraZeneca's third quarter revenue rose 3% to $6.6bn. That reflects good growth in new products, offset by a decline in some more mature drugs and a reduction in 'externalisation' or 'collaboration' revenues (where Astra sells a drug to a third party in return for an upfront payment and a small ongoing interest).
Underlying earnings per share was flat year-on-year at $0.94, although remains up 16% year-to-date.
Product Sales in the third quarter rose 7% to $6.5bn. That reflects 34% growth in new medicine sales, which now account for 52% of total revenue. Collaboration revenues fell 78% to $58m.
Third quarter Oncology revenues rose 22% to $2.8bn. That reflected very strong growth from the newer Tagrisso, Imfinzi and Lynparza treatments as all three benefitted from regulatory approvals in new markets. Enhertu the Daiichi Sankyo drug Astra invested in, has seen sales start to pick up following initial regulatory approvals.
CVRM (cardiovascular and respiratory medicine) sales rose 4% to $1.8bn, as an increase in Farxiga sales more than offset weakness elsewhere in the portfolio. That weakness reflects disruption to sales in China due to COVID-19.
Respiratory & Immunology sales slipped 12% to $1.2bn, in the quarter, largely down to a significant decline in Pulmicort sales in China. That's down to the COVID-19 pandemic disrupting the treatment of respiratory patients in a hospital setting.
The Other Medicines portfolio saw revenue rise 1% to $734m, thanks to strong growth in Nexium and newly launched FluMist nasal spray flu vaccine.
The pipeline continues to deliver new approvals and data readouts, with particular successes in the oncology division. Results from the phase III trials of the group's coronavirus vaccine are expected later this year, with data under rolling review by regulatory authorities.
Free cash flow across the last nine months came in at $2.4bn, up 157% year-on-year, as the group benefited from higher profits and modestly lower capital expenditure.
Net debt of $13.8bn is 15.6% up on the start of the year, largely down to dividend payments.
Astra expects full year revenues to increase by high single-digit percentages, with core earnings per share to rise by a mid- to high-teens percentage.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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