Biotech giant Amgen Inc. (AMGN, Financial) is on a mission to meet unmet medical needs while generating solid returns for investors. As part of this strategy, the company has recently been taking advantage of lower stock valuations to make attractive buyout offers for biotech players with promising treatments.
The company announced its latest acquisition deal on Monday, saying it has entered into an agreement to purchase Horizon Therapeutics PLC (HZNP, Financial), a biopharmaceutical company that focuses on treatments for rare autoimmune diseases, in an all-cash deal worth $26.4 billion. This follows hot on the heels of the company’s $3.7 billion ChemoCentryx acquisition, which it completed just this past October in order to obtain Tavneos, a first-in-class treatment for ANCA-associated vasculitis.
Horizon’s share price spiked 15% on Monday following the news, though it had been on the rise for months before as investors were aware that the companies were negotiating a potential deal.
Horizon: another step in solidifying rare disease footprint
The Horizon acquisition represents a huge step in Amgen’s efforts to expand its presence in rare disease treatments. The acquisition price is roughly 17% of Amgen’s entire $145 billion market cap.
Some investors might ask, why would a company want to focus on rare diseases that have a lower total addressable market than more common diseases? Focusing on rare diseases does not have to mean giving up profits, though. Just like any other business, it is all about a combination of how good the products work and how well the management knows how to run the operation.
In fact, the benefits of a superior management team can be a key deciding factor in whether or not an acquisition deal makes sense. It is not uncommon for a small biotech company to seek a buyer for the sole reason it believes a more experienced company can get its treatments out to more patients. As Amgen said in a statement on its ChemoCentryx deal:
“When it comes to rare and complex diseases like ANCA-associated vasculitis, it’s not enough to simply have a medicine like Tavneos on the market. Amgen has also committed to assisting advocacy groups like the Vasculitis Foundation and others in the ANCA-associated vasculitis community by working with leading experts and creating resources to help to reach and educate both patients and the specialists who care for them.”
The main treatment that Horizon brings to the table is its best-seller Tepezza, which was approved in early 2020 as the first treatment for thyroid eye disease. Last year, the drug’s sales more than doubled to $1.67 billion, representing about half of the company’s total 2021 sales of $3.23 billion. Horizon’s other treatments include Krystexxa for uncontrolled gout, which saw sales soar by 39% last year, and several other drugs.
A track record of solid growth and profitability
Over the past couple of decades, Amgen has achieved an excellent record of growth and profitability. More recently, the Ebitda growth rate has begun to slow down, though revenue growth remains strong.
Amgen’s top revenue-generating treatments in recent years (from 2018-2021) include Enbrel (for the treatment of five chronic diseases, including rheumatoid arthritis), Prolia (for osteoporosis), Otezla (for certain cases of plaque psoriasis) and Xgeva (an injection for preventing serious bone problems). Growth in Prolia and Otezla is helping make up for slight declines in Enbrel and a drop-off in revenue for Neulasta, which helps reduce the chance of infection due to white blood cell count and is suffering from increasing biosimilar competition.
After a couple of decades of industry-leading success, it was only a matter of time before Amgen’s older products began seeing revenue slowdowns amidst upcoming patent expirations and biosimilar competition. That is why the company is taking a proactive approach to growth by expanding its portfolio of rare disease treatments, which are less likely to see competition.
Amgen also has its own biosimilar business that it is focusing on growing, which investors are less enthusiastic about because it means adding lower-margin products to the mix. However, I personally would rather see continued growth, even if it means ramping up the biosimilar business. Amgen has one of the largest stakes in the biosimilar industry, and its four decades of experience mean the company has what it takes to sustainably expand global access to these life-saving medications while generating proceeds to fund research and development of new treatments.
Valuation
Given Amgen’s solid track record of growth and the fact it is still actively pursing acquisitions, new pipeline opportunities and biosimilars, analysts from Morningstar (MORN, Financial) are estimating a three-to-five-year earnings per share growth rate of 9.65% for the company, though the revenue growth rate for the same period is expected to be lower at 2.98%.
At a price of $272.62 per share, Amgen has a price-earnings ratio of 21.86, a forward price-earnings ratio of 14.71 and a GF Value of $266.39, earning it a rating of “fairly valued” from the GF Value chart.
Amgen’s shares fell slightly on Monday following the Horizon announcement, so it seems like at the moment, the market only really cares about the potential arbitrage opportunity with Horizon’s shares.
However, Horizon is currently already profitable, so even if its sales remain flat (which seems highly unlikely), it is already set to be immediately value-accretive to Amgen’s portfolio. For comparison, Amgen had $25.9 billion in revenue for 2021 compared to Horizon’s $3.7 billion, so right off the bat that is a 14% boost if the deal goes through. This will be countered by the $26.4 billion cash acquisition price from a value standpoint, but the market tends to pay more attention to revenue and earnings over debt levels.
All things considered, I think Amgen’s stock is fairly valued at the moment, but the market may be underestimating this established giant’s ability to continue growing even amidst difficult market conditions.
