The biotech sector got a boost of life this morning after Alexion Pharmaceuticals announced it had entered into an agreement with Synageva Biopharma in a deal worth $8.4 billion. Both firms operate in the rare disease niche of the biotech sector, giving the companies command of being able to charge massive amounts for its drugs. Alexion is down -7.24% in early morning trading and Synageva is rocketing higher by 113.50% in early morning trading.

Alexion

Alexion pays 139% premium for Synageva

The deal states that Alexion will pay Synageva shareholders $115 cash and provide 0.6581 Alexion shares, which gives Synageva a hefty valuation price of $230, compared to yesterday’s close of $95.51. Alexion management says the premium is worth it when considering the potentially lucrative pipeline that Synageva has including the SBC-103, a replacement enzyme for people suffering from metabolic diseases. Management maintains forecast of $150 million in cost synergies as early as 2017 and provide a boost to earnings beginning in 2018.

Investors concerned with overpayment for Synageva

After reading over the deal, its terms and seeing reaction in share prices, investors of Alexion are concerned that the company may have overpaid for Synageva. While the rare disease niche of the biotech market commands high prices, Synageva is not profitable and is still in the trial stages for its drug pipeline. This is a concern because of the hefty premium paid for the business and yet the company still remains in the trial phases for its SBC-103. This certainly brings the idea of a bubble to mind. The “Dot-Com” bubble featured many similarities with companies going public or being acquired at hefty valuations, when the company is not even turned a profit yet. While Alexion’s Soliris drug, which treats kidney failure, commands a cost of 340,000 British Pounds a year, per patient, this acquisition still carries a bit of risk.

Alexion
Finviz.com

 

Overall, the biotech space got a nice boost this morning with this bullish takeover deal. However, looking deeper into the deal, Alexion paid a very significant premium for Synageva and its trial drugs, which is a bit of a concern, but management is confident that the new assets will help build Alexion’s portfolio and contribute significantly to earnings down the road.

Disclosure: None