On Thursday, shares of ChemoCentryx Inc. (CCXI, Financial) shot up more than 110% before closing the day at $50.43 on the news that the small-cap biotech company has entered into an agreement to be acquired by major drugmaker Amgen Inc. (AMGN, Financial) in an all-cash deal worth $3.7 billion, or $52 per share.
ChemoCentryx focuses on treatments for autoimmune disorders. The acquisition deal will include ChemoCentryx’s Tavneos, a treatment for a “transformative, first-in-class treatment for ANCA-associated vasculitis," for which there is significant unmet medical need. For decades, Amgen has been a leader in inflammation and nephrology, so Tavneos fits well with the rest of the drug giant’s portfolio.
The acquisition price represents a 115% premium to ChemoCentryx’s closing price on Wednesday, which has mostly already been priced in by the market as of the close of trading on Thursday. However, Amgen’s shares were mostly flat for the day, rising slightly before closing at a loss of 0.6%, so it seems the market is not yet counting it as part of Amgen’s future.
Tavneos’ potential
Tavneos is a selective complement component 5a receptor inhibitor that was approved by the U.S. Food and Drug Administration in October 2021 for adult patients with severe active ANCA-associated vasculitis.
As with many autoimmune diseases, ANCA-associated vasculitis is not the name of one disease in particular, but rather a group of diseases of unknown origin that have similar autoimmune symptoms, in this case small vessel inflammation. Inflamed vessels are more likely to rupture or become occluded, leading to a systemic autoimmune response in which the body’s immune system attacks its own kidneys, lungs and other organs.
In addition to the U.S., Tavneos has also been approved in Japan and the European Union. In the first quarter of 2022, which was its first full quarter of sales, the drug brought in revenue of $5.4 million.
With an estimated 40,000 people suffering from vasculitis in the U.S. alone, analysts surveyed by Refinitiv expect Tavneos to achieve $1 billion in sales by 2027.
Amgen shares just got cheaper
Tavneos’ potential for $1 billion in annual sales could help make up for falling sales of Amgen’s arthritis drug Enbrel. Sales of Embrel were down 8% to $1.05 billion in the second quarter of 2022 due to stiff competition from newer treatments, and the patents for the drug are expected to expire in 2029.
The GF Value chart rates Amgen as fairly valued. The forward price-earnings ratio looks cheap at 14.01, and if the company can manage growth in its bottom line, then the current valuation might look even cheaper.
Amgen also has a good history of shareholder returns with a dividend yield of 3% and a three-year average share buyback ratio of 3.9%.
In addition to acquisitions like ChemoCentryx, which add to the company’s name-brand drug portfolio, Amgen has also been getting into the biosimilars market. As patents on drugs expire, competitors have the opportunity to swoop in with a drug that does the same thing for a lower price, which is why companies and investors alike always dread patent expirations.
Amgen is making the patent expirations of competitors work for it with biosimilars such as Amgevita (a biosimilar to Humira) and Riabni (a biosimilar to Rituxan).
Takeaway
With Amgen’s latest acquisition deal, it plans to acquire a drug that could be worth $1 billion in sales. Given the considerable premium represented by the acquisition price, it’s highly unlikely that shareholders will strike down the proposition.
This adds another feather to the value case for Amgen, which also includes growth in the biosimilars business and a commitment to shareholder returns.
