In June 2015, Alexion (ALXN) acquired Synageva BioPharma for $8.4 billion, creating a robust pipeline in the biotechnology industry. This acquisition has enabled Alexion Pharmaceuticals to expand its drug portfolio to three products targeting four rare diseases in 2015.
The above diagram shows the synergies that are expected from Alexion Pharmaceuticals’ acquisition of Synageva BioPharma.
Synageva BioPharma has added two key metabolic drugs, Kanuma and Strensiq, to Alexion’s portfolio. After its launch, Kanuma is expected to add more than $1 billion in annual revenues. This diversification is expected to reduce over-reliance of Alexion Pharmaceuticals on its flagship product Soliris. Other biotechnology companies such as Regeneron (REGN), Biogen (BIIB), and AbbVie (ABBV) are also actively involved in reducing their dependence on a small number of drugs and the subsequent business concentration risk.
The deal is also expected to increase operating efficiency for the combined entity, as manufacturing redundancies in pill finishing and packaging can be eliminated. Kanuma will benefit by leveraging Alexion’s strong global presence in 50 countries with marginal increase in administration costs.
Synageva BioPharma has strengthened Alexion’s research and development (or R&D) pipeline by adding innovative molecules, while the combined entity can stabilize its R&D expense to the industry average of 17% to 18% revenues post 2017. The target company also carries certain tax credits and carry forward losses, which will help the combined entity to reduce its tax outgoings until 2016. From 2017, Alexion expects to maintain about 14% to 16% effective tax rate for the combined entity.
Investors can benefit from the synergies realized in the Alexion-Synageva deal, yet reduce exposure to company-specific risks by investing in the iShares Nasdaq Biotechnology ETF (IBB). Alexion accounts for 5.07% of IBB’s total holdings.