According to a Bloomberg report, Roche is prepared to offer $130 a share to purchase Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN). In other words, Roche is attempting to pay 20 times Alexion’s annual sales, which would give Roche just one FDA-approved product. Is this company crazy?
What Is So Attractive?
Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)’s Soliris is FDA-approved for two indications: Paroxysmal Nocturnal Hemogloinuria (PNH) and Atyptical Hemolytic Uremic Syndrome (aHUS). Both are rare diseases, PNH destroys red blood cells, while aHUS, a genetic disease, damages vital organs.
Soliris has an orphan designation, meaning it’s used on rare diseases and has additional years of exclusivity on the market, and it’s being tested on five other rare indications. The investment outlook for Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is solely based on Soliris and its development.
The company does have four other products in its pipeline, but all are early-phase and preclinical-products, and there is no proof that any will ever see an FDA approval.
Analysts currently estimate that Soliris is being used by physicians for off-label indications, to treat the additional ailments that are being tested in clinical trials. If all indications are successful — and we don’t know whether they will be — then analysts project peak sales will exceed $3.5 billion.
If Soliris is found ineffective in any of its ongoing five clinical studies, peak sales could be negatively affected, as current off-label use could no longer continue, and Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) would not be able to market ongoing clinical studies to prescribing physicians.
What Does Roche See?
Under the absolute best of circumstances, Roche could earn $3.5 billion a year by acquiring Alexion. Currently, Alexion has a profit margin of 23.75%.
In this particular exercise I am going to use its 23.75% profit margin and assume that it remains steady. After all, it’s a solid return, and there is no way to determine peak margins on peak sales.
Therefore, if peak sales are reached, Roche would earn $830 million annually in net profit by acquiring Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN). If Roche were to pay $130 per share, or $25 billion, it would take 30 years for the acquisition to return a profit for Roche.
By that time, Soliris would have a generic, and its place as the world’s most expensive drug – price tag of $440,000 – would be obsolete. While this may sound like a bearish outlook, it’s more of a reality, as all biopharmaceutical companies eventually lose their patents.