Alexion Valuation Could Choke Any Roche Bid

15.07.2013 -

Buying Alexion Pharmaceuticals would help Roche make a splash in the newly lucrative area of rare or so-called orphan diseases, but it could command a price that the Swiss drugmaker is ultimately not willing to pay.

Two people familiar with the matter have told Reuters that the Basel-based firm is seeking financing for a potential bid for Alexion, which specializes in the treatment of rare diseases.

The sky-high prices and lower development and marketing costs of treatments for orphan diseases are increasingly drawing the attention of big pharmaceutical companies as their older drugs lose patent protection.

A bid for Alexion would mark an attempt by Roche to diversify beyond its core cancer competencies through acquisitions, following a string of failures from its own research operations for drugs to treat cardio metabolic diseases.

But some investors in an impromptu survey by analyst Mark Schoenebaum of ISI group were concerned about the likely valuation.

Shares in Alexion currently trade at 32 times forecast earnings for the next 12 months, according to Thomson Reuters data, more than double Amgen's 13.2 times and at a premium to Biogen Idec Inc's 24.1 times.

"Quite frankly, I don't like this deal. It risks being overpriced. Most of the U.S. is in a bubble," said Helvea analyst Olav Zilian.

Alexion shares surged 12.6% on Friday to close at $114.26 on the Nasdaq, valuing the company at more than $22 billion. Roche has declined to comment on the potential bid.


Despite only treating a few thousand patients worldwide, sales of Alexion's rare blood disease drug Solaris are forecast by analysts to reach $1.5 billion this year. Citi analysts forecast peak sales for Alexion of $6 billion in 2025.

With Roche's top-selling medicines expected to come under pressure from cheaper copies known as "biosimilars" from 2016, a buyout of Alexion would give them a good product with little competition, said Citi analyst Andrew Baum.

But the steep prices charged for orphan drugs are under growing scrutiny from cash-strapped healthcare providers, principally governments, that are increasingly having to balance the acute needs of a few against the wider interests of society.

Kepler Cheuvreux analyst Fabian Wenner questioned whether Roche investors would sanction such an expensive deal.

"Would it make sense from a value accretion point of view? No way. Roche shareholders are unlikely to be very happy about the price, and Roche management knows this."

Roche walked away from a $6.8 billion bid last year to buy U.S. gene-sequencing company Illumina after shareholders, holding out for a higher offer, blocked its move to gain seats on the firm's board.

Even so, ultra-low interest rates make it a good time for financing deals.

After paying down debt from its 2009 takeover of Californian biotech Genentech for nearly $47 billion, Roche is soon expected to be back within its target range for a net debt to total assets ratio of 0-15%, so they have room to take on more.

Roche has also earned a reputation as a hard negotiator, and Citi analysts said in a report before New York's market close on Friday that they might not have to pay a particularly large premium. Using the highest recent valuation multiple of 15 times revenue, they estimated a premium of 10-15%.

But buying Alexion, which currently only sells one drug, would signal a change of tack for Roche, whose recent shopping list has focused on companies developing technology platforms.

"I believe shareholders will want to see Roche spend money on things that make sure the company is still at the bleeding edge of technology in 20 years from now," Wenner said.