Navigating the Challenges and Opportunities: A closer look at Amgen's acquisition of Horizon Therapeutics
In December of last year, Amgen announced a deal to purchase Horizon Therapeutics through a combination of cash and debt in the year's largest biotech buyout, beating out Johnson & Johnson and Sanofi in a three-way contest. Amgen, a renowned biotechnology business with more than 20 drugs on the market, acquired ChemoCentryx earlier in the previous year. Horizon is a biopharmaceutical business established in Ireland that specializes on medicines for rare, autoimmune, and inflammatory disorders. Each Horizon shareholder is anticipated to get $116.5 per share, which is significantly greater than Horizon's closing price of $78.76 prior to the announcement in late November. The transaction is anticipated to close in the first half of 2023.
In 2020, over half of the previous year's total transaction value will be accounted for by pharmaceutical M&A. As a result of the epidemic, it is not surprising that several biotech companies, such as Pfizer, are receiving substantial cash flows from their successful vaccination programs. This trend is anticipated to continue, with the sector's most significant companies continuing to grow. Big Pharma have targeted biotech firms at the beginning of 2022 due to a significant sell-off of shares by individual investors, resulting in low acquisition prices. This gives Amgen with a profitable opportunity, given their stagnant third-quarter income. With Amgen's best-selling medicine Enbrel losing patent exclusivity in 2023, Horizon's acquisition augurs well for the company's future growth.
This acquisition represents a new equilibrium for deal pricing, contrary to the tendency in the pharmaceutical business, where target companies are acquired at or below their IPO prices. The acquisition is valued at $27.8 billion, representing an EV/EBITDA multiple of 45x for 2021, which is significantly higher than the S&P Biotech Index's current trading multiple of 11.4 times earnings. While Amgen's chairman and CEO Robert A. Bradway spoke of the "compelling opportunity" in combining Amgen's R&D portfolio with Horizon's innovative medicines to deliver long-term growth and analysts deemed this deal a major win due to expected synergies, Amgen's investors were more concerned about the value of the deal, resulting in a slight decline in Amgen's stock on Monday. An important issue was that this would boost Amgen's net debt-to-EBITDA ratio from 2.2x to 4.0x, resulting in a high leverage for the company's present credit rating, which S&P reduced from A- to BBB+.
Amgen is currently confronting an issue with their top line, which is at risk of losing 40% of 2022 revenues by 2030. With a projected top-line of $5 to $6 billion, the acquisition of Horizon helps fill some of the void. Horizon possesses significant assets that intersect with Amgen's expertise in auto-immune illnesses. Amgen will commercialize Horizon's breakthrough Thyroid Eye Disease (TED) product Tepezza, which the FDA has approved for use, utilizing its 20-year experience in inflammation and nephrology as well as its global reach. Tepezza has substantial growth potential in important international markets including as Europe and Japan, which supports Amgen's worldwide expansion strategy. Horizon will be able to speed the clinical development of its rare illness therapies for patients by leveraging Amgen's outstanding research and worldwide development capabilities, while it may still face competition in the immunology field. Despite this, Amgen believes the maximum sales potential is in excess of $10 billion given its market reach. This results in great cash flow, allowing Amgen to concentrate on capital allocation, dividend growth, and market-competitive breakthroughs such as the technology for subcutaneous delivery of Tepezza. Consequently, the long-term growth possibilities will mitigate the negative effects of losing exclusivity.
Despite the fact that Amgen's CEO stated that they anticipate the purchase to be accretive to earnings two years after closing, this is largely contingent on the level of cost savings. Increased efficiency has resulted in a $500 million reduction in pre-tax costs, including tax and capitalization, allowing the company to maintain a high operating leverage. This involves "some operational and administrative reorganization" at Horizon, but the number of personnel affected remains unknown.
Following a number of high-profile clinical failures and a general dearth of transaction flow, biotechnology has endured a rough year. This year, we have witnessed buyers and sellers utilizing CBRS or contingent value REITs to attempt to bridge the valuation gap. These are payouts contingent upon the assets of the target company reaching specified sales or regulatory benchmarks following the closing of the transaction. The reality is that the deal's financing expenses likely exceed the existing earnings contribution. Consequently, expansion and synergies are required to increase future profits per share growth. Given the amount of dry powder in the sector, it will be intriguing to see if there is a more consistent flow of biotech acquisitions in 2023.