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AstraZeneca drops 6% after announcing $6.9 billion cancer drug deal with Daiichi Sankyo

Shares of AstraZeneca Plc (NYSE: AZN) dropped about 6% on NYSE during the pre-market hours and continued to trade in the negative territory after the US markets opened. Investors felt that the company is paying too much to its collaborative partner Daiichi Sankyo for its cancer drug deal which amounts to about $6.9 billion.

Under the agreement terms, both companies will jointly develop and commercialize cancer drug (trastuzumab deruxtecan) globally, except in Japan where Daiichi Sankyo will maintain exclusive rights. Daiichi Sankyo will be solely responsible for manufacturing and supply.

AstraZeneca will pay Daiichi Sankyo an upfront payment of $1.35 billion, half of which is due upon execution, with the remainder payable 12 months later. Contingent payments of up to $5.55 billion include $3.8 billion for potential successful achievement of future regulatory and other milestones, as well as $1.75 billion for sales-related milestones.

The deal, which will become effective from 29 March, 2019, is expected to be neutral to AstraZeneca’s core earnings in 2019. This transaction is expected to add to AstraZeneca’s core EPS from 2020 and contribute significantly in 2023. There are no closing conditions to the transaction.

AstraZeneca will pay Daiichi Sankyo an upfront payment of $1.35 billion

The pharma giant also announced its intent to raise up to about $3.5 billion through a placing of new ordinary shares with both its existing and new institutional investors.

The upfront payment and near-term milestones under the transaction will be funded from the proceeds of a new equity placement of approximately $3.5 billion, of which more than half will be used to fund this transaction and the ongoing collaboration. The balance of the proceeds will be used for the repayment of the company’s $1 billion, 1.95% notes due on 18 September 2019 and for general corporate purposes.

The transaction and funding arrangements do not impact the company’s financial guidance for 2019.

AstraZeneca reported its Q4 results last month. Earnings for the quarter declined 22% to 82 cents per share and core EPS stood at $1.58. Revenue rose 11% year-over-year to $6.4 billion.

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