As it turns out, Amgen (Nasdaq:AMGN) didn't have to stretch too far to seal the deal for oncology biotech company Onyx Pharmaceuticals (Nasdaq:ONXX). While Amgen's initial bid of $120 per Onyx share set off a nearly two-month auction process, in the end it took only an extra $5 per share to complete the deal as there was apparently only passing interest from other Big Pharma players to pay up for Onyx's portfolio of oncology drugs. All in all, while it's a worthwhile deal that helps patch over some near-term growth concerns for Amgen, it's unlikely to be a transformative deal.
Amgen and Onyx announced that the two companies had reached a definitive agreement by which Amgen will acquire Onyx for $125 per share in cash. At that price, Amgen is paying an enterprise value of just under $10 billion and a premium of over 45% to the share price before word first broke that Onyx was receiving indications of interest.
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Amgen will be financing this deal with over $8 billion in bank loans priced at LIBOR plus 104bp. The key drug to the deal, multiple myeloma drug Kyprolis, is already approved by the FDA and the sales of the drug (coupled with cutting redundant expenses at Onyx) should lead to Amgen seeing accretion from the deal in 2015.
Advancing The Ball, But Not Changing The Game
While it's possible that Onyx has a hidden gem in preclinical research, this deal looks more like an incremental step forward for Amgen than a transformative deal that will fundamentally change the company's trajectory. In particular, this deal for Onyx will help Amgen get through a challenging growth gap in the 2014-2016 period and better leverage its existing sales and manufacturing infrastructure.
Said differently, Amgen investors should not look at this as a deal on par with Johnson & Johnson's (NYSE:JNJ) acquisition of Cougar or Celgene's (Nasdaq:CELG) acquisition of Abraxis. What's more, while there is potential upside from Onyx's drug palbociclib (licensed to Pfizer (NYSE:PFE)), there are are also risks to Kyprolis from an increasingly competitive myeloma market, including Celgene's portfolio and Phase III drugs from Takeda and Bristol-Myers Squibb (NYSE:BMY).
The Bottom Line
All told, I believe Kyprolis can add $7 billion to $8 billion in net value to Amgen (net of the purchase price), assuming that Amgen can strip out at least half of Onyx's non-R&D operating expenses. The remainder of Onyx's portfolio and pipeline (again, excluding any hidden gems in preclinical development) is likely worth around $500 million to $1.5 billion. Relative to a pre-deal enterprise value of $81.5 billion for Amgen, then, this deal is worthwhile and value-additive, but again not a transformative event.
Amgen share's jumped 9% in early trading. The company is likely to continue to face pointed questions regarding its ability to leverage past deals, but the company does appear to be following a coherent strategy of lower-risk building block deals.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.