.
MERGER CASE STUDY – ALEXION PHARMA (ALXN) VS. PTC THERAPEUTICS, ARENA PHARMACEUTICALS (ARNA), AND ACADIA PHARMACEUTICALS (ACAD)[endnoteRef:1] [1: This is a work of fiction in that the author is not aware of any actual merger agreement between ALXN and RETA, is but based on real facts from real companies. Names of personnel are real names, but the author attests that he has no knowledge of their respective functions, of operations of the board, or other corporate matters. Quotations attributed to these individuals or anyone else are entirely fictional. This Case is not intended to imply an endorsement to purchase shares in any of the companies mentioned in the text. ] INTRODUCTION David Anderson, the EVP Finance of Alexion Pharmaceuticals (ALXN) was worried. First, in February 2017, the company decided to shelve development of its leading drug candidate, a mucopolysaccharidosis (MPS) drug, SBC-103. Once considered a promising candidate, having achieved “orphan drug” designation from the FDA, it demonstrated promising early-stage clinical results as late as July 2016. But now, spiraling R&D costs and research delays forced the company to shift priorities, betting instead on FDA approval for broadening approval of Soliris, Alexion’s flagship drug. Despite the obvious profitability of Soliris, the company was supposed to use it as a springboard into more common diseases and, with it, larger markets. In summary, ALXN’s growth strategy was to eventually transition from a developer of high-margin, small-market orphan drugs into low-margin, large-market drugs for more common diseases. Once established with a portfolio of orphan drugs, the idea was to use the heft of the company’s market capitalization to leverage into larger markets. However, so far, events haven’t unfolded as planned. The project now shelved, SBC-103, was acquired by Alexion as part of its $8.4 billion acquisition of Synageva in 2015. The acquisition of Synageva was specifically intended to deepen and broaden ALXN’s product pipeline, an intention clearly not reached as of 2017, and does not seem as reachable now as it seemed in 2015. Indeed, the prize for ALXN, also acquired in the Synageva deal, was supposed to be Kanuma, another rare-disease therapy. Kanuma (sebelipase alfa), however, has proven to be disappointing. In FY 2016, Kanuma’s first year on the market, net sales amounted to approximately $29 million, less than 1% of the $3.08 billion in total net product sales for the company. Worse yet, the meager sales represented a very poor 0.34% return on ALXN’s all-equity investment. An All-Stock Deal for Synageva The Synageva deal involved an exchange offer to acquire all the outstanding shares of Synageva common stock, an offer which expired at 12:00 a.m. Eastern Time on June 19, 2015 and was not extended. The depositary for the exchange offer confirmed that Alexion successfully acquired a total of 21,021,124 shares of Synageva common stock through the exchange, representing approximately 56% of Synageva’s outstanding common stock. All shares that were validly tendered and not withdrawn were accepted for payment in accordance with the terms of the exchange offer and applicable law. Accordingly, Synageva common stock ceased to be traded on the NASDAQ Global Market following the close of trading on June 22, 2015. Following its acceptance of the shares tendered in the exchange offer, after close of the financial markets on June 22, 2015, Alexion caused the previously agreed merger of its subsidiary with and into Synageva, followed by a merger of Synageva with and into another Alexion subsidiary. Because of the completed mergers, Synageva became a wholly owned subsidiary of Alexion. Parenthetically, all shares of Synageva common stock not validly tendered into the exchange offer have been cancelled and converted into the right to receive merger consideration (in cash) in the same amounts offered in the exchange offer. What’s at Stake The failure of SBC-103, in addition to the slow start for Kanuma, puts pressure on the Board to select a winner next time a purchase comes along. The Board has taken a “Once bitten, twice shy” position. The next merger must be realistically valued. But, at the same time, the Board understands that, to acquire at a reasonable valuation, ALXN must acquire before FDA approvals of new drug applications. Therefore, there is risk to these purchases: the new drug application could fail the approval process or, even if approved, sales may not be as high as expected. Alexion had also recently (2015 and 2016) inked deals with three small drug developers. Alexion Pharmaceuticals has agreements with X-Chem Pharmaceuticals (a privately-held biotech development company, incorporated in 2009, headquartered in Waltham, MA ) to identify novel drug candidates from X-Chem's proprietary drug discovery engine, and with Moderna Therapeutics, Inc. (a privately-held biotech specializing in the commercialization of messenger RNA, incorporated in 2011 and headquartered in Cambridge, MA) that provides the option to purchase drug products for the development and commercialization of Moderna's messenger RNA therapeutics to treat rare diseases. However, these ventures are long-term and highly speculative. There is no guarantee that either of these agreements will yield a workable drug candidate. Nothing promising has emerged as of this date. Thus, with the disappointment of Kanuma a reality, Alexion was still without viable new drugs in its pipeline. Accordingly, in addition to the ventures with X-Chem and Moderna, on April 11, 2018, Alexion purchased the Stockholm-based development biopharma, Wilson Therapeutics AB for $858 million in cash. According to the news announcement, Wilson “develops novel therapies for patients with rare copper-mediated disorders.” Their primary drug candidate, WTX101, is in Phase 3 development as a treatment for Wilson disease[footnoteRef:1] and has received Orphan Drug (refer to ORPHAN DRUG STATUS, below) and Fast Track designation in both the US and EU. Even so, Phase 3 trials are only in the enrollment stage; it is unlikely that, if approved, the drug would not see commercialization until 2022 at the earliest. [1: Wilson’s Disease (aka progressive lenticular degeneration) is a rare genetic disorder characterized by excess copper stored in various body tissues, particularly the liver, brain, and corneas of the eyes. The disease is progressive and, if left untreated, it may cause liver (hepatic) disease, central nervous system dysfunction, and death. It is believed to affect one in 30,000 persons, but currently, only 3,000 patients have been diagnosed in the US this year. The underlying cause has been linked to any of 300 separate mutations to the ATP7B gene in chromosome 13q14.3] Another drug, Strensiq (asfotase alfa), is an Alexion-owned pharmaceutical developed under “orphan drug” status (for more information, refer to ORPHAN DRUG STATUS, below). It treats a very rare disorder, hypophosphatasia[footnoteRef:2]. Approved in FY 2015, sales of the drug improved from its year-one sales (partial) of $12 million to total net product sales of $210 million in FY 2016. Still, it is apparent from these figures that Soliris, with net product sales in FY 2016 of $2.843 billion, is the mainstay of the corporation. [2: Hypophosphatasia is a rare, and sometimes fatal, metabolic bone disease. Clinical symptoms range from the rapidly fatal, perinatal variant, with profound skeletal malformation and weakness and respiratory compromise. The underlying cause appears to be subnormal serum activity of the TNSALP enzyme, which is caused by one of 200 genetic mutations identified to date. Genetic inheritance is recessive for the perinatal and infantile forms but either recessive or dominant in the milder forms. The prevalence of the severe forms of hypophosphatasia is estimated to be 1:100,000 of live births.] In the meanwhile, ALXN would rely on sales of its flagship pharmaceutical, Soliris (eculizumab), which is currently approved in over 40 countries. “It’s purely a matter of cash flow timing”, said Julie O’Neill, EVP of Global Operations, “Better for cash flow to be sooner, rather than later, and we don’t have the budget for both expansion of Soliris labeling and the development of new product pipeline.” Expanded labelling of Soliris has the potential to hit the market by late 2018 or early 2019. Anderson disagreed with this assessment, and thus the battle was afoot. Anderson believed there was more than adequate capital for another merger, and, in fact, believed ALXN couldn’t afford not to seek additional product pipeline. Nonetheless, management understood that it couldn’t rely on Soliris forever. The Soliris patent for use as a PNH[footnoteRef:3] treatment expires in 2021, for NMSOD[footnoteRef:4] in 2023, and for aHUS[footnoteRef:5], 2026. At this point in time, there are only a few in Alexion R & D or its pipeline beyond expanded use of Soliris, and drug development can take a very long time, often 15-20 years. At present, ALXN is working on ALXN-1210, which is also targeted to patients suffering from aHUS and may be ready for Phase 3 by the middle of 2019. Approval of this drug is by no means assured. [3: PNH: paroxysmal nocturnal hemoglobinuria is a rare often-fatal disease characterized by destruction of red blood cells by the body’s own immune system, caused by a defect in the formation of a specific red blood cell wall protein ] [4: NMSOD: relapsing neuromyelitis optica spectrum disorder (aka Devic’s disease) and its variants is a condition of the inflammation and demyelination of the optic nerve and spinal cord which leads to blindness and spinal cord function. Causes have been found to be an autoimmune associated with anti-AQP4, anti-MOG, and anti-NF antibodies. Incidence is rare, ranging from 0.053 to 0.40 per 100,000 persons.] [5: aHUS: atypical hemolytic uremic syndrome is an extremely rare, often fatal, progressive disease caused by an uncontrolled activation of the body’s immune system, which leads to thrombotic microangiopathy, which in turn leads to strokes, heart attack, renal disease and death.] Alexion therefore faced important strategic questions. First, they will clearly need to buy another pharmaceutical pipeline, one with very high probabilities of approval – at least in late Phase 2 or early Phase 3. Second, having been burned by the Synageva purchase, ALXN needed to decide whether the company should search for companies that have a non-orphan drug pipeline, or whether they should acquire something more mainstream. Third, how much capital should be earmarked for this M & A activity, and how much could ALXN afford? Given the uncertainties of the business, what probabilities could be used to determine expected value, if any? Finally, what expected cash flow could be generated by any new pipeline, and how additive would they be to shareholder value? All of these issues were on Anderson’s mind as he was about to join a strategy session with upper management. With the Synageva acquisition appearing to wane in importance, attention had centered on its existing joint venture agreements with X-Chem and