Why AstraZeneca Wants To Buy Alexion Pharmaceuticals
Late last week, AstraZeneca said that it would acquire Alexion Pharmaceuticals ALXN – a company that is best known for its Soliris and Ultomiris drugs which are used to treat rare blood disorders – in a cash and stock deal valued at about $39 billion. With AstraZeneca’s Revenues being increasingly dependent on cancer drugs over recent years, the move would help the company gain a foothold in the market for drugs for rare diseases.
Rare diseases are a promising area for big pharma companies for a couple of reasons. Firstly, pricing is usually very high (Soliris costs roughly $600k per year, for example) and insurers typically bear these expenses. Secondly, the marketing costs related to these drugs is also low given their highly specialized nature and limited competition, allowing for better margins.
Alexion stock has been a laggard in the pharma space, largely moving sideways in recent years, despite posting strong growth (sales grew at an average of 17% each year over the last 5 years). This was partly due to the company’s acquisition spree, which has not gone down too well with investors. It spent nearly $4 billion in the last 3 years acquiring multiple drug companies. Now the deal values Alexion stock at about $175 per share, a premium of around 45% over Friday’s close. Even with the premium, Alexion’s valuation would stand at a reasonable 14.5x projected 2020 earnings, making it a fair deal for AstraZeneca.
Alexion Pharmaceuticals was part of our Out Of Favor Health Care Stocks theme, which includes healthcare and pharma companies that have shown strong historical revenue growth, improving fundamentals, and yet have not rallied much. For more such companies and the detailed selection criteria, view our theme Out Of Favor Health Care Stocks
[Updated 8/28/20] Alexion Pharmaceuticals: Good Growth But Out Of Favor
Alexion Pharmaceuticals stock hasn’t moved much this year. But that’s not new. Despite growing its EBITDA per share by nearly 100% since 2018, the company’s stock has increased less than 10% over that period. EBITDA is a measure of operational profitability, not counting non-cash expenses such as depreciation and amortization. In addition to this, the company’s current EV/EBITDA multiple, a measure of how well the market is rewarding the firm, is 8.3, which is significantly below the nearly 14.5 figure for the pharma industry. This could signal a buying opportunity. The essence is that Alexion has grown its revenue consistently, with significant improvement in EBITDA margin in 2019 that has sustained this year as well. Our dashboard What Factors Drove 7.8% Change In Alexion Pharmaceuticals Stock Between 2018 And Now? summarizes what has driven Alexion’s stock price in the last 2-3 years, making it clear that despite good financial performance, the market is not favoring it yet.
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Alexion has been on an acquisition spree. It has spent nearly $4 billion in the last 2-3 years acquiring several drug companies. Considering that the pharma industry thrives on innovation and R&D, relying on acquisition for growth hasn’t gone down well with investors. It appears that investors would have preferred for Alexion to spend the money on repurchase of shares instead of acquisitions.
But Consistent Performance Could Change Investor Perspective
However, underlying financials suggest a different story. It could be argued whether the price that Alexion paid for acquisitions made sense or not, but there is no denying that underlying financials have improved. The company’s revenue has grown consistently, increasing from $3.6 billion in 2017 to almost $5 billion in 2019. If we look at the last twelve months, the figure stands at over $5.5 billion. In addition, Alexion’s EBITDA Margin increased from 38.5% in 2017 to 54.8% in 2019, implying a 42.3% jump. Despite this, its EV/EBITDA multiple has fallen from 20.6 in 2018 to 8.3 currently. Clearly, there is a concern regarding Alexion’s acquisition approach. But if these acquisitions eventually pan out, there is the potential to unlock a lot of value.
So, Alexion might give good returns from current levels. But, what if you’re looking for a more balanced portfolio instead? Here’s a top-quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.
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