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TheStreet Open House

Roche Won't Buy Alexion Because Deal Is Too Expensive

Stocks in this article: ALXN RHHBY VRTX SRPT BMRN

BOSTON ( TheStreet) -- I have no doubt Roche (RHHBY) has considered buying Alexion Pharmaceuticals (ALXN - Get Report) (I'm sure other large drug companies have taken an interested look as well) but an acquisition at today's lofty valuation is very hard to justify.

My prediction: No Roche-for-Alexion deal. I'm taking the other side of Jim Cramer's call.

Roche is reportedly exploring financing options for an Alexion takeout, according to Reuters and Bloomberg. The Swiss drug giant has not denied these stories, which leads Jim to believe a deal will happen, even if Alexion is overvalued.

To his credit, Jim caught on early to the incredible investment opportunity created by orphan drug companies. He's been a longtime fan of Alexion, BioMarin Pharma (BMRN - Get Report) and Vertex Pharma (VRTX - Get Report), among others -- all orphan drug stock winners. And he's right that Big Pharma has been slower to realize the value of orphan drug development, which is why catching up through M&A makes sense.

But price still matters, which is why it's hard to see the logic in Roche buying Alexion today. Spending $25-30 billion to acquire Alexion would be highly dilutive to Roche. Alexion's main drug Soliris is expected to generate about $1.5 billion this year and may reach peak sales of $3 billion to as much as $6 billion, depending on which analyst forecasts you believe.

Soliris sounds like an attractive takeover target, but the risk is too extreme when you consider Alexion is already valued at $20 billion. Today, the stock trades at more than 32 times 2014 earnings.

We've seen this story play out before when Roche went after the gene sequencing company Illumina (ILMN). A Roche-Illumina combination made a lot of strategic sense, but Roche ultimately walked away because the nearly $7 billion price couldn't be justified financially.

If anything, an acquisition of Alexion is harder to justify from a strategic and financial perspective, Sure, Roche would like to dig into the orphan drug market, but buying Alexion would not produce much cost-saving synergies because the two companies don't have overlapping research or manufacturing capabilities.

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