Amgen: “Winner” For Horizon (NASDAQ:AMGN)

Amgen(Applied Molecular Genetics Inc.) Capability Center in Tampa.

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Amgen (NASDAQ:AMGN) has become the “winner” in the bidding war for Horizon Therapeutics (HZNP). But investors acted with modest reservations, with shares down 1.5% upon the final announcement, representing approximately $2 billion in value going up into smoke in a generally upbeat market. Investors appear to have some doubts as the price tag for Horizon has been increasing rapidly in recent weeks. Shares are down a bit more since the start of the month, when rumors about an imminent deal already hit the newswires.

It has been August when I last had a look at Amgen, as it was making a bolt-on deal to add to its pipeline. Little could I have imagined that such a big deal would arrive so soon.

Back To August

Amgen has been a real growth darling in the 2010s, as shares rose from $15 billion to $23 billion in the period between 2010 and 2020, as already fat operating margins rose to roughly 40% of sales, albeit that growth was more pronounced in the first half of this decade long time period. While growth in itself was not that impressive, real growth was seen as 40% of the shares have been bought back, boosting growth on a per-share basis.

While these achievements were impressive, the reality is that shares rose a factor of 5 times over the same period of time, with the company posting adjusted earnings of $15 per share and GAAP earnings of $13 per share. Net debt of $21 billion was quite manageable given that adjusted earnings came in at $9 billion, with shares trading at 16-19 times earnings based on a $230 per share valuation in 2020, ahead of the pandemic. The company guided for 2020 sales to come in at $25 billion, driven by the Otezla purchase from Bristol Myers (BMY) yet organic growth was hard to come by.

The company did grow 2020 sales to $25.4 billion, as it guided for sales to rise to $26.2 billion in 2021. After posting adjusted earnings just over $16 per share in 2020, the company guided for stabilization with (adjusted) earnings seen between $16 and $17 per share in 2021. To boost growth, Amgen announced a $1.9 billion deal for Five Prime and $900 million deal for Teneobio in 2021.

In the end, Amgen posted $26 billion in sales in 2021 on which it posted adjusted earnings of $17 per share while net debt inched up to $25 billion. Despite some (pipeline) deals, sales were only seen flat in 2022, as buybacks should translate into modest earnings per share growth. It was interesting to see the company posting an increase in net debt to $29 billion in August, alongside the second quarter earnings report, certainly as the company announced a $3.7 billion deal for ChemoCentryx. Amgen furthermore had a huge $7 billion IRS issue with regard to low taxes rates paid in the past, meaning that net debt could increase quite a bit following an adverse ruling, as even politicians got involved with the matter.

With shares trading around the $250 mark at the time, I believed a 14 times adjusted earnings guidance looked reasonable, yet multiples expanded to 20 times if we focus on GAAP earnings. The reality is that many adjustments were made to earnings, not necessarily stock-based compensation, but mostly tied to dealmaking. This and an increase in net debt could become a limiting factor for the shares in my view.

What Happened?

After a brief dip to the $220 mark in September, shares have recovered to $275 at the moment of writing, down from a high of $288 per share. In November, Amgen posted third quarter results, revealing a $27.2 billion net debt load, ahead of the $3.7 billion ChemoCentryx deal. The 534 million shares outstanding now represent a $147 billion equity valuation at $275 per share, for a $178 billion enterprise valuation, equal to nearly 7 times sales and 16 times adjusted earnings.

The big news was of course the fact that Amgen has emerged as the winner to purchase Horizon, after news broke at the start of the month that the company was holding talks with Johnson & Johnson (JNJ), Sanofi (SNY) and Amgen, among others.

In the end, Amgen paid $116.50 per share in cash, in a deal valued at $27.8 billion in terms of the equity valuation for Horizon, giving Amgen access to drugs like Tepezza, Krystexxa and Uplizna, combined with other medications generating $3.2 billion in sales in 2021. The company furthermore has a rich pipeline with notably many assets in phase II and some in phase III as well, having potential to bolster the pipeline and growth profile of Amgen here.

Of course, the pro forma net debt load will jump to $55 billion here, or a touch higher if we account for a modest net debt load held by the business, which is a huge number. That being said, the revenue multiple looks quite rich. With revenues pegged at $3.6 billion a year the sales multiple comes in at 7-8 times, a bit higher than Amgen’s own valuation.

On the promising side is that $500 million in synergies are targeted to be achieved, after-tax representing about $7 billion in value at these rates here, a substantial number.

Note that shares of Horizon actually traded at these levels last in 2021 already, before selling off to just the $60s in October of this year, and now having nearly doubled.

Concluding Thoughts

The deal for Amgen is quite large, as the deal is equivalent to about 15% of Amgen’s valuation here. The deal seems to make some sense, driven by synergies and potential for improved growth profile.

The reality is that while the earnings numbers will not change meaningfully, financing costs on the deal likely outweigh the current earnings contribution. This means that growth, deleveraging and synergies are likely needed to drive earnings per share growth as the pro forma net debt load of $55 billion is very substantial here, with non-GAAP earnings of the standalone business trading comes in around $13 billion per annum here.

Given the solid outperformance of the shares in recent times and the leverage incurred, I am a bit more cautious than I have been in August, seeing no reasons to join the “winner” here.

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