AstraZeneca To Pay $39B For Alexion — 14% Off Its All-Time High

In April 2014 I was driving to Harvard Square to teach business strategy to a group of Chinese executives.

My example of a differentiation strategy — which enables a company to charge a very high price for its product — was Alexion Pharmaceuticals’s ALXN Soliris, a drug that sustains the lives of patients suffering from a disease that destroys their red blood cells nightly.

When I gave my presentation to the executives, insurance companies were paying a cool $569,000 a year for each covered Soliris patient. As of August 2020, that price had jumped 19% to $678,302, according to GoodRx.

On December 12, the Wall Street Journal reported that the Boston-based Alexion had agreed to be acquired by AstraZeneca for $175 a share — 45% over where the stock closed on December 11.

That’s a great deal for investors in the company who have suffered from a long decline. How so? That $39 billion price is 14% off its all-time high, which as I wrote in January 2017, was $204 a share in July 2015.

It should also put a smile on the face of Paul Singer’s Elliott Management — which has criticized Alexion for bad takeovers, according to the New York Times NYT .

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This deal is good news for AstraZeneca shareholders who could use some given recent bad news on its Covid-19 vaccine. But that’s only if another bidder doesn’t swoop in to buy Alexion at a higher price.

(I have no financial interest in the securities mentioned).

AstraZeneca To Pay $39 Billion For Alexion

AstraZeneca — whose Covid-19 vaccine efforts have stumbled in recent weeks — changed the subject by announcing it would buy Alexion in a bid to boost its presence in the rare-disease immunology market.

AstraZeneca’s overall business is in decent shape. Third quarter sales rose 3% to $6.6 billion while its third quarter profit of 94 cents a share fell six cents shy of analysts’ estimates.

The pandemic took the blame, according to Bloomberg, which noted that people are visiting doctors less frequently as hospitals shun non-Covid-related medical treatments.

Meanwhile AstraZeneca credited its cancer drugs for enabling it to maintain its 2020 guidance. AstraZeneca shares have risen a modest 9% in 2020 as of December 11.

Sadly for investors AstraZeneca is falling behind Pfizer PFE and Moderna in the race to vaccinate the world against Covid-19.

AstraZeneca has been criticized due to “disclosures around an early clinical-trial dosing mistake and a range of recent vaccine-effectiveness results that confused outside researchers, some of whom called for more data before authorization of the shot,” noted the Journal.

Nevertheless, AstraZeneca executives told reporters on December 12 that the vaccine would be ready for mass inoculations in some countries “over the next few weeks.” AstraZeneca also expects late-stage results from the delayed U.S. clinical trial next month, according to the Journal.

Why Is Alexion Worth So Much To AstraZeneca?

One good place to start with answering that question is that $678,302 annual price tag for Alexion’s Soliris. As I wrote in 2017, Soliris treats the roughly 8,000 patients afflicted by paroxysmal nocturnal hemoglobinuria (PNH) — that destroys their red blood cells each night.

Alexion’s patent enables it to charge a very high price for this vital medicine for PNH patients. Soliris is one of several rare-disease drugs that appeal to drugmakers because they require small sales forces and command high prices because health insurers only have one or two members with the rare disease, noted the Journal.

Alexion was founded in 1992 by a Yale Medical School professor named Leonard Bell and Steve Squinto, a researcher at biotech Regeneron, I wrote in 2017. This pair of scientists was interested in complement — a series of enzymes that destroy foreign substances in the body and their corresponding complement blockers that keep this destruction under control.

Alexion struggled to get the company off the ground. It was saved from oblivion by U.S. Surgical which paid $5 million for Alexion to use its complement blockers to make pig organs that could be inserted into people without being destroyed by complement.

Alexion went public in 1996 — but it took a few years to settle on selling Soliris to treat PNH. Squinto went through 10,000 targets for the monoclonal antibody. Sadly Alexion failed in its efforts to use Soliris as a treatment for rheumatoid arthritis, kidney disease or post-heart-attack-inflammation.

Fortunately, Alexion hit pay dirt when Bell decided to target PNH — a tiny market with no competition. That proved to be a good decision. Alexion enjoyed 44% annual revenue growth between 1996 and 2015 — driving its stock to a peak of $204 in July 2015.

Sadly Bell’s April 2015 retirement left Alexion in poor hands. By December 2016, Bell’s successor, David Hallal, was out as CEO as was CFO Vikas Sinha because “senior management pressured staff to get customers to order [Soliris] earlier than needed to meet financial targets,” according to the Wall Street Journal.

Alexion Posted Strong Results In The Third Quarter

In its most recent quarter, Alexion — whose stock had risen 12% for the year as of December 11 — performed well. According to its third quarter financial update, Alexion’s revenue and GAAP earnings per share both popped 26%, to about $1.6 billion and $2.62, respectively, from the previous year.

On October 29, one analyst had a bright outlook on Alexion’s future. That’s when Morningstar MORN analyst, Anna Baran wrote, “Sales in complement [Soliris now accounts for $5 billion in annual revenue] were strong, management raised guidance, and we have a positive outlook for the rest of the year. Additionally, several pipeline assets are poised to move into phase 2 or phase 3 trials over the next couple quarters, which should help to diversify the company’s revenue in an important defense against competition.”

It would not surprise me to see other bidders enter the fray for Alexion — Dow Jones noted that at 10 times its adjusted profit forecast, AstraZeneca’s bid is on the low side.

Elliott Management has been pushing for Alexion to sell itself since May when it announced it would pay $1.4 billion for Portola Pharmaceuticals PTLA — causing Alexion shares to fall sharply, noted the Times.

Perhaps investors like Elliott to enjoy a further spike in its price before Alexion gives up its independence.

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