April 1, 2019

Breakingviews: AstraZeneca takes precision approach to cancer M&A

by Breakingviews.

AstraZeneca is taking a precision approach in the race to treat cancer. The UK drugmaker on Thursday evening said it will pay up to $6.9 billion to work with Daiichi Sankyo on a treatment for breast cancer. Compared to the risk of an acquisition, it’s a relatively painless way of expanding in a hot area.

Cancer treatments are a priority for big pharmaceutical companies, as innovative drugs should be relatively immune to pricing pressure caused by healthcare reform in the United States. The snag is that deals are expensive and risky: Bristol-Myers Squibb’s $74 billion acquisition of Celgene, announced earlier this year, riled shareholders. AstraZeneca also has a lot of debt: Moody‘s reckons net borrowing will be around five times its cash flow from operations this year.

The deal with Daiichi Sankyo looks a smart alternative. The company run by CEO Pascal Soriot gains access to a treatment which targets cancer cells accurately, making it more efficient than conventional chemotherapy for patients whose cancer is spreading. If approved, the drug will be used for just one in five breast cancer sufferers. But AstraZeneca reckons it could be used more broadly, and in other ailments like colorectal cancer.

By structuring the deal as a collaboration, AstraZeneca will only pay $1.35 billion up front, with the rest dependent on whether the drug is approved and hits sales targets. Citigroup analysts expect peak sales of $3.2 billion, implying a maximum price of around four times sales, assuming AstraZeneca gets 50 percent of the revenue. That’s in line with sector valuations, according to Refinitiv data. That’s not exactly cheap, but if the drug delivers on its promise to be used in a range of cancers, the multiple will fall.

Shares in the $100 billion company fell over 5 percent on Friday morning, reflecting dilution from a $3.5 billion equity placing the group is using to fund the deal and preserve its credit rating. Daiichi’s Sankyo shares jumped around 16 percent, adding over $4 billion to the Japanese company’s market value. That suggests its shareholders were struggling to see the full value in the product, or worried about its cost of developing it. AstraZeneca still has a lot of work to do to prove them wrong, but at least it has hedged some of the risks.


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