Amgen, Inc., the world’s largest independent biotechnology company, is taking an optimistic step towards providing cancer treatments. The company is buying Onyx Pharmaceuticals, Inc., another biotech company specialized in cancer treatment.
“Attractive opportunities like this are rare in our industry,” said Robert Bradway, Amgen CEO and chairman, at a teleconference regarding the acquisition. “We felt this opportunity was strategically compelling for us.”
The deal makes the top five of largest pharmaceutical acquisitions, at $125 per share for Onyx’s outstanding stock. The total will cost Amgen $10.4 billion in cash.
The main purpose of the purchase is to add Onyx’s Kyprolis, a cancer treatment drug approved for injection within the US last year, to Amgen’s portfolio. The drug promises to treat cancer that affects a type of white blood cell in the bone marrow and is called myeloma.
Kyprolis is still at an early stage of its life cycle, which is beneficial because Amgen can use its depth of experience and resources to advance the product, Bradway said about the timing of the acquisition. “It’s at a point where we feel we can help maximize the full potential of the product.”
Bradway is convinced Kyprolis will be a hit. “[It] has a superior safety profile,” he said. “It’s a very potent inhibitor. We were impressed with the number of physicians who already feel this is the best …”
For Amgen, the addition of Kyprolis promises high growth in long term, as other cash-generators are entering the late product cycle. Enbrel, a rheumatology and dermatology treatment, for example, generated most of the sales growth in 2012. But because of a royalty arrangement with Pfizer, it will stop growing until after 2014, the company projects in its annual report.
The company is financing the purchase with $8.1 billion from bank loans and the rest with available cash. Despite the high debt-load, Amgen expects to retain its investment grade credit rating. Given the low financing costs—five-year loans with an average interest charge of LIBOR plus 104 basis points—and previous predictions of a higher per-share cost, analysts say the deal is relatively positive, but could face competition.
“We’re very optimistic we’ll be able to close this deal quite quickly,” Bradway said. In addition, the transaction should not impede Amgen’s flexibility to act on future opportunities.
“We expect to generate cash flows of $5 billion to $7 billion of which a significant portion is in the United States,” said John Peacock, Amgen CFO. “So we’ll certainly have the flexibility to continue to do small deals within the United States and [outside the] United States.”
While the myeloma market is highly competitive, with similar drugs like Takeda’s MLN9708 and Bristol’s Elotuzumab ahead of Kyprolis in development, Amgen has nine late-stage products in their pipeline which can bridge the growth gap until Kyprolis hits the market. However, the company did not state when it expects Kyprolis to start selling in the United Sates.
But Onyx brings more to the table than just Kyprolis. Its oncology portfolio includes Nexavar tablets for breast cancer treatment to be submitted to the US Food and Drug Administration (FDA), Stivarga tablets for the treatment of colon cancer, Palbociclib for advanced breast cancer, and Oprozomib against multiple forms of myeloma.
According to Citigroup research, Amgen’s growth plans could pan out. The analysts estimate Palbociclib could grow from sales of $200 million in 2016 to $2.2 billion in 2022. The acquisition will also have a positive impact on net income and earnings per share.
With the addition of Kyprolis and Onyx’s myeloma portfolio, Amgen is expected to grow earnings per share by 10 percent every year from 2012-2015, but there are risks, say the analysts: “We expect the deal to [enhance earnings] by 2015, but note that [it] requires significant [operational] synergies and does inject some risk as the myeloma market is highly competitive.”