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Will the AstraZeneca share price go back to £10 after the $39bn Alexion deal?

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The AstraZeneca (LSE: AZN) share price fell on Monday morning after the company said it would spend $39bn acquiring US-listed Alexion Pharmaceuticals.

AstraZeneca’s share price has now fallen by more than 20% from the 52-week high of 10,120p seen earlier this year. But profits are on track to rise by 15% this year and the company’s Covid-19 vaccine appears to be successful.

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Boss Pascal Soriot has now turned his attention to acquisitions with the potential to expand the group’s pipeline of new drugs. Soriot has made an offer to buy US-based firm Alexion, which specialises in treatments for rare diseases. 

What will AZN get for $39bn?

$39bn is a lot of money. I suspect some AstraZeneca shareholders will be asking whether the price tag is fair. After all, Alexion only generated $5bn of revenue last year and has just five medicines.

However, Alexion’s sales rose by 21% last year and the company has “11 molecules across more than 20 clinical-development programmes.” AstraZeneca believes Alexion’s expertise could potentially be relevant to many inflammatory and autoimmune diseases. It also believes some of its own expertise could help target the rare diseases in which Alexion specialises.

AstraZeneca expects to make cost savings of around $500m, but the real potential lies in future products and new marketing opportunities.

To some extent, AstraZeneca shareholders will have to just trust Soriot’s judgement. Fortunately, I think his record so far has been good. Since becoming CEO, he’s orchestrated a recovery that’s seen AstraZ’s share price double in six years. He’s also led the development of an impressive portfolio of fast-growing new cancer treatments.

$39bn cash/share deal looks manageable

AstraZeneca’s offer for Alexion values the smaller company at $39bn. We don’t know yet if this offer will be accepted by Alexion shareholders. But if it is, AZN will pay $60 in cash plus 1.06 AstraZeneca shares for each Alexion share.

This is equivalent to a $13bn cash payment, according to my sums. The remaining $26bn would be paid with new AstraZeneca shares. To fund this, I estimate the buyer will have to increase its share count by about 20% and add perhaps $10bn of additional debt.

AstraZeneca’s share price has wobbled today. I’m not surprised, as this is a big expense. But I think the financial impact of the deal should be manageable.

AstraZeneca share price: further to go?

My view is that AstraZeneca shares are probably fully priced at the moment, on around 25 times 2020 forecast earnings. However, the group’s performance has improved steadily over the last few years. Earnings per share are expected to rise by 15% this year, and by around 20% next year.

In my view, Soriot has shown good judgement and has delivered on his promise of creating scientific value at the firm. If I owned AZN shares, I’d probably stay put. Although I think the stock could face a period of consolidation, over time, I think Astra shares could return to this year’s high of over £10.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.