Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) announced earlier this month that it would acquire Synageva Biopharma Corp (NASDAQ:GEVA) in an $8.4 billion deal.
The reaction of the market to the deal has been mixed. ALXN stock dropped about 8% in reaction to the news, with many saying Alexion was overpaying, but shares have recovered some of those losses since then. (Naturally, GEVA stock skyrocketed by more than double on the announcement, as the purchase price of $230 per share represented a premium of 140%.)
We’ll look at the upsides and downsides of the deal to see whether ALXN made the right call:
A Couple Pros
Potentially better collaborative research: The first thing to savor about this acquisition is that Alexion will be gaining access to another company that shares its visions. An inherent implication of this is that some other professionals who have experience and passion for developing medicines for folks with rare diseases will be joining ALXN. Beyond what is already on the ground at both companies, this deal might lead to the birth of greater pipeline candidates through collaborative thinking.
The chairman of Alexion’s board of directors somewhat echoed this point by expressing his excitement at the prospect of having GEVA’s Dr. Felix Baker on board.
It’s difficult assign a quantitative value to this particular benefit, but investors might want to see it as one that could make ALXN significantly more successful in just about every aspect of the company over the long-term. This benefit is simply beyond GEVA’s current pipeline size.
Analysts at Baird Equity Research seemingly see this hidden benefit as well. Christopher Raymond of Baird told Reuters that:
“While some investors may be picking their jaws off the floor at such a valuation, we note that Synageva has only disclosed a fraction of its development efforts.”
It is only natural that GEVA execs will reveal further undisclosed information to ALXN once the transaction is completed.
Market reach for Kanuma will expand: Another reason some might think Alexion is overpaying for Synageva is that the market potential of Kanuma, GEVA’s most advanced pipeline candidate, isn’t high enough to warrant it. And since Kanuma is the closest to reaching the market, analysts will mostly assess the deal relative to the drug. By acquiring GEVA at $8.4 billion, ALXN is paying up to 14 times Kanuma’s potential peak sales, according to The Street’s Adam Feuerstein.
One thing to consider here, however, is that Kanuma’s valuations are most likely based on Synageva’s market reach. But once this drug is in the hands of Alexion, the market potential for the drug is likely to increase.
ALXN said it would leverage its established expertise in the rare-disease space to improve the market reach of Kanuma. It is possible that both companies considered this when negotiating the deal — hence the higher valuation.
Downsides to Consider
Paying way above what the pros would pay: This still is an aggressive, speculative move on Alexion’s part. Alexion’s $230 per share not only was 140% more than Synageva’s pre-bid close, but it was almost 85% higher than the top price target on GEVA stock.
Even if ALXN ends up being able to increase Kanuma’s market value, it would take a lot from that drug alone to justify the valuation of this deal.
Pipeline candidates will increase the cost of acquisition: ALXN has been talking up the prospect of having over 30 pipeline candidates in its books, with 12 coming from Synageva. While this prospect is fascinating, with all of the candidates in preclinical stages, it is difficult to place a quantitative value on this.
Right now, the best anyone not inside the company could say is that each drug has a 50-50 chance of going to market. Again, that’s the super-optimistic scenario. Depending on who you ask, the odds are far, far worse. Take this math, which puts it at about 1 in 5,000 that a preclincial drug ever sees the light of day.
Moreover, the cost of the deal will go up eventually since ALXN will become responsible for the costs of the clinical trials.
Still, if clinical trials for these drugs are promising, ALXN itself could become an acquisition target, and we’ll quickly forget about the GEVA valuation argument we’re having now.
Bottom Line
On the surface, Alexion overpaid for Synageva. That’s a take you’ll hear from most people when a company pays more than double what a company is worth.
Still, I believe the acquisition is a good call. If you factor in better collaborative researches, improved market reach for Kanuma (and potentially SBC-103) and becoming a potential acquisition target … there appear to be enough good reasons for Alexion’s high-premium bid.
In addition, there was also a mention of GEVA’s expression platform — a manufacturing technology that could help ALXN improve its drug production process.
The benefits and rationale of this deal will become more apparent over the long term. ALXN looks good if you’ve got time on your side.
As of this writing, Craig Adeynaju did not hold a position in any of the aforementioned securities.
