Equity index futures are trading well above fair value on Monday morning. Amid all of the death and illness that the Covid-19 pandemic has forced upon the human race, optimism is renewed as the first shipments of the recently authorized (for emergency use) Pfizer (PFE) / BioNTech (BNTX) vaccine makes its way around the nation, and the globe. Supplies are extremely limited and those in need will be prioritized. That said, with a bit of luck, another developer, U.S. biotech Moderna (MRNA) kneels in the on-deck circle, hopefully ready to add to available supplies of early vaccines as soon as next week.
Others are close. One would be Johnson & Johnson (JNJ) , working on a one-dose vaccine that scuttlebutt has it, could produce serious data as early as next month. Then there is AstraZeneca (AZN) — and it is difficult to assess just how excited we can get over the viral vector-based vaccine derived from a coronavirus that infects chimpanzees. There have been questions about the vaccine’s efficacy, but even worst case, the number you hear is 70% on average.
That’s not the 95% number that the messenger RNA vaccines seem to be able to boast of, but still far better than the original goal of 50% efficacy that planet earth seemed ready to accept a few months back — if they could get it. This vaccine also had clinical studies halted for a while as a volunteer in the UK had developed a negative neurological issue that was determined to not be directly related to the vaccine.
I will tell you, as a Covid survivor, lasting neurological side effects are part of Covid, so this is a real concern for myself and many other survivors as we weigh the safety of these vaccines. Nobody knows if it is safe for those who have suffered the overactive immune response. Let’s think about this stock, AstraZeneca, as that name is top of the news this morning for reasons other than coronavirus vaccines.
Over the weekend, AstraZeneca announced that the firm has entered into an agreement to acquire Alexion (ALXN) , a firm specializing in researching potential treatment for rare and ultra-rare diseases. Why would AstraZeneca do this? Growth. When growth slows and you can buy it, you do. AZN is trading lower this morning, both here and abroad, as the firm will pay a hefty premium.
On Friday night, ALXN closed at $120.98. I see the shares trading close to $158 prior to Monday’s opening bell. Under the terms agreed to, Alexion shareholders will receive $60 in cash and 2.1243 shares of AZN, which is an ADS, in exchange for each one share of AXLN.
A little backstory? AstraZeneca reported a disappointing quarter back on November 5. The firm swung and missed on forecasts for both sales and profitability. Year-over-year revenue growth had slowed from 16% to 8% to 2.7%, sequentially. They needed to get out there and buy something without much overlap.
Alexion currently has a pipeline of eleven molecules across more than twenty clinical development programs working on a broad array of rare diseases. Current projections for the global market for rare disease treatment indicate it should become a double-digit growth business. I have read that only a rough 5% of over 7K rare diseases have FDA-approved therapeutics.
The short of it is this. AZN sales growth has been slowing rapidly. ALXN has seen sales growth remain steady in the 20% plus range for quarter after quarter, and focuses on a field of study that should grow, itself. Hence, the approximately 45% premium (based on Friday’s closing prices, not pre-opening last sales). Alexion shareholders will end up controlling about 15% of the combined company.
Investors will note that AstraZeneca did enter into a bridge financing facility on Friday ahead of announcing the deal, but at least given how little overlap there is between the two, one would think that there should not be a lot in the way of regulatory issue that slow or prevent the deal from closing. The deal should close by Q3 2021, and should provide $500 million in recurring run rate, pre-tax synergies per year by the end of year three.
As readers well know, I have not been shy about investing in big pharma or specific biotechs. I remain long Pfizer, Moderna, Johnson & Johnson, AbbVie (ABBV) , and Merck (MRK) . I have my eyes on Bristol-Myers Squibb (BMY) . To tell you the truth, I like them all more than AZN. Based on forward P/E ratios, AZN is more expensive than all of the above, except Moderna, which is really in a different category. AZN is also more expensive than all but Moderna and AbbVie in terms of price to book. Yet, AstraZeneca pays out a far lower dividend than all except Moderna (no dividend), in terms of yield. I am not interested in buying AZN even on this dip.
With the exception of that mid-July spike, American Depository Shares of AZN have traded in a tight range since last April, peaking close to the $58 level a number of times, while bounding off of the $50 level on numerous occasions.
On Monday morning, this stock will knock on that door once again. I would rather buy these shares on any momentum-based rally coming off of support should that support show up yet again, than risk buying the shares just above support. One of these times, that door is going to swing open.
If I were long the shares, the $50 level would be my panic point, not an add. At least not until it proves itself again. I am going to sit on my hands in this name today.
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