Over $27 billion: Amgen's top three reasons and potential challenges for acquiring Horizon

On December 12, Amgen announced that it would acquire Horizon Therapeutics for $116.50 per share in cash. Previously, Sanofi and Johnson & Johnson were involved in this bidding war.

The $27.8 billion transaction is the largest biotech acquisition to date in 2022. For Horizon, it's undoubtedly a matter of shouting and money being made together. On the day the acquisition was disclosed, Horizon shares rose 14%. Compared with the closing price on November 29, Novartis offered a premium of about 47.9% per share.

Because Horizon is based in Ireland, the company and its acquirers are required to repeatedly disclose information during negotiations under Ireland's acquisition rules. On December 3, Johnson & Johnson announced its withdrawal from the bid. On December 11, Sanofi also said that the transaction price expectation did not meet its "value creation criteria".

This year's M&A activity has been less than many investors had expected. Why are so many big biopharmaceutical companies rushing to acquire Horizon? Amgen, which finally created this huge biotechnology merger and acquisition, is the subsequent digestion smooth?

01

Bombshell, MNC is good

Like many of its peers, Amgen faces the possibility of a severe revenue decline by 2030, as key products such as the psoriasis treatment Otezza and the arthritis treatment Enbrel begin to encounter competition from generic and biosimilars.

Enbrel expects to bring in $4.1 billion in revenue this year, and it faces additional near-term threats as rival Humira's biosimilars hit the market on a large scale next year.

Mizuho Bank analyst Salim Syed noted that Amgen's $10 billion in 2022 revenue, or about 40% of that, could be lost in 2030. Horizon's drugs can help fill this gap.

Among Horizon's offerings, the most important is Tepezza. As a rare disease drug for the treatment of thyroid eye disease, the commercialization performance in 2020 was quite eye-catching, and it is one of the best marketed products of rare disease drugs ever. According to FactSet, analysts expect Horizon to harvest $2 billion in sales from Tepezza this year.

Another blockbuster product of Horizon, Krystexxa, which treats uncontrolled gout, is expected to generate $706 million in sales this year. In addition, Uplinza, which targets certain patients with an autoimmune disease called neuroretinitis spectrum disorder, expects $159 million in sales this year.

Jefferies analyst Michael Yee expects the acquisition of Horizon to add $2 billion to $5 billion in new product revenue for Amgen after 2024 to 2030, and offset some of the risks of new drug development.

Matt Phipps, an analyst at investment bank William Blair, wrote that the three drugs combined are expected to bring in $3.3 billion in revenue in 2023.

02

Horizon's pipeline in progress

If Amgen's acquisition of Horizon is "big fish eating small fish", then Horizon's small fish has also eaten "shrimp and rice" as the saying goes.

According to public information, as early as 2014, Horizon acquired Vidara Therapeutics for $660 million, and then spent $45 million to introduce Nuvo Research's osteoarthritis drug Pennsaid distribution rights in the United States. In 2015, Horizon spent $1.1 billion on Hyperion Therapeutic.

Of course, Horizon, which has a soft spot for inflammation and rare diseases, is also willing to spend more money. In February 2021, Horizon announced the acquisition of Viela Bio, which was listed on NASDAQ in October 2019, for a total consideration of approximately $3.05 billion for $53 per share in cash. The acquisition is a nearly 53% premium to Viela's closing price two days ago (Jan. 29), but Horizon is more concerned about "lizi" — which will "significantly expand" its inflammatory pipeline layout and increase its portfolio of rare disease drugs.

After a few years of going around in circles, these assets, which Horizon bought, now seem to have become Amgen's favorite. Jared Holz, a healthcare equity strategist at Oppenheimer, said in an email to investors that Amgen may be as interested in Horizon's inflammatory pipeline as Tepezza.

"Amgen can position the Horizon transaction as a complement to near-term revenue while synergizing its long-term pipeline of traditional businesses and areas of expertise." Holz added.

In a press release for this week's acquisition, Amgen introduced Horizon's pipeline of drugs for conditions such as myasthenia gravis, lupus erythematosus and Sjögren's syndrome. According to Amgen's head of R&D, David Reese, it "has the scale, expertise and resources to rapidly advance the company's pipeline molecules and support global registration and commercialization."

03

Possible tax benefits?

Mizuho Bank's Syed said in a previous note that Horizon's status as an Irish company could reduce Amgen's tax burden.

In 2014, Horizon moved its headquarters to Ireland by acquiring Vidara. In line with local policy, this reduces the company's tax expenses. Syed wrote: "Amgen is facing potentially higher taxes due to ongoing problems with its Puerto Rico plant, and in our view, the deal with Horizon may help alleviate that." ”

The Puerto Rico facility is an important production site for Amgen, which has been inspected by the FDA at least once a year and has performed well since 2009 until April 2019. During that inspection, three FDA officials spent eight days conducting a systematic inspection of the entire facility, covering products ranging from biologics to combinations of biologics and devices. Subsequently, a series of problems were exposed, and the FDA urged Amgen to implement rectification.

At a news conference on Dec. 12, Amgen did not mention any tax incentives. Based on the day's investor call, Amgen said it could not provide guidance on possible tax implications due to Irish takeover rules.

In addition, Amgen also revealed that the acquisition will generate about $10 billion in "strong cash flow" in the 12 months following the third quarter of 2022, which is expected to increase non-GAAP earnings per share starting in 2024 and save at least $500 million in pre-tax costs by the end of the third year after the transaction closes.

04

Liabilities: The other side of the coin

Although Horizon "has a promising future", in all fairness, mergers and acquisitions are still above the current market price, and the exits of Johnson & Johnson and Sanofi are more or less telling.

To beat its rivals, Amgen will pay Horizon nearly 45 times EV/EBITDA (enterprise value multiple, a measure of company valuation). The broader S&P Biotech Index is currently trading at 11.4 times earnings.

Overall, what is this concept? Even the touted $500 million cost savings, including taxes and capitalization, are only 37 percent of the cash premium Amgen paid (a premium over Horizon's 3-month undisturbed share price).

On the other hand, Amgen also needs to consider the debt burden. After the acquisition closes, that more than doubles to nearly $56 billion. According to analysts' calculations, Amgen's net debt-to-EBITDA ratio will rise sharply from about 2.2 times to more than 4 times. However, Amgen emphasized leveraging the combined $10 billion cash flow and plans to reduce debt leverage to current levels by the end of 2025.

To realize the acquisition, Amgen has secured a $28.5 billion bridge loan. However, it will need to use the bond market to repay loans. Interest rates have risen sharply since Amgen's last bond issuance in February. The 10-year bond due in 2032 is currently trading at 90% of face value and yielding 4.7%.

In addition to the $27.8 billion acquisition, other MNC deals have been reported recently. For example, Johnson & Johnson, which exited its bid for Horizon's assets, decided in early November to buy cardiac equipment maker Abiomed for $16.6 billion to boost sales in its medical device division, which had been lagging behind the pharmaceutical division.

On November 21, Merck followed suit with the acquisition of Imago BioSciences for $1.35 billion in response to the impending expiration of Keytruda's patent for auto-tumor immunotherapy.

Pfizer, which has made a lot of money due to COVID-19 business in the past two years, has also increased its layout of acquired assets. In August, Pfizer agreed to acquire Global Blood Therapeutics for $5.4 billion, a deal that gave it a niche in the treatment of sickle cell disease. In May, Pfizer also bought Biohaven for $11.6 billion to fill the internal medicine sector.

However, not all companies are stepping on the dividend like Pfizer. Like most companies that are busy with mergers and acquisitions due to the proximity of the patent cliff, Amgen is likely to worry about tight funds in the new year.