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Amgen’s big bang theory
October 2013
by Amy Swinderman  |  Email the author
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THOUSAND OAKS, Calif.—In its latest attempt to tap into the high growth potential of cancer therapeutics, Amgen announced on Aug. 25 that it will acquire all of the outstanding shares of Onyx Pharmaceuticals Inc. for $125 per share, or $10.4 billion in cash.
 
With a growing multiple myeloma franchise, Onyx has multiple oncology compounds in various stages of clinical development. The deal gives Amgen, which rose to prominence on the value of therapeutics that alleviate the side effects of chemotherapy, global rights to Onyx's oncology portfolio and pipeline. At center stage in that pipeline is Kyprolis, a multiple myeloma treatment approved by the U.S. Food and Drug Administration last year.
 
"Amgen has a unique opportunity to add value to Kyprolis, a product which is at an early and promising stage of its launch," said Robert A. Bradway, chairman and CEO of Amgen, in a statement announcing the deal.  
 
Kyprolis generated $125 million in sales in the first half of this year, and according to projections by Piper Jaffray, that figure could multiply to $1.16 billon by 2016. Onyx has global rights to Kyprolis (excluding Japan) and has clinical trials underway supporting an expected European Union filing in 2014.  
 
"To limit risk, deal makers are gravitating to companies with cancer drugs that are already approved and on sale," notes Barron's Johanna Barrett.  
 
The acquisition also adds to Amgen's late-stage pipeline nine products awaiting registration-enabling data by 2016, four of which are "innovative, first-in class oncology products," Amgen noted in a conference call to investors.  
 
The acquisition is expected to be accretive to Amgen's adjusted net income in 2015. And that's a good thing, as Amgen's flagship anemia drugs, Aranesp and Epogen, have been in decline for years because of usage restrictions and safety concerns.  
 
"The revenue will help Amgen offset sales lost as some of its biggest-selling products start facing lower-priced competition from generic rivals referred to as biosimilars, and before promising experimental drugs can find their way through the pipeline," Barrett adds.
 
In what some analysts are calling a "cat-and-mouse game," the deal was first placed on the table in early June, when Amgen stated its intention to acquire Onyx for about $120 per share, or about $10 billion in cash. Onyx soon rejected that offer and entertained serious bids from several other companies that soon began courting it.   Amgen dangled a $130-per-share offer over Onyx—on the condition that the company produce data from a late-stage study of Kyprolis. According to a U.S. Securities and Exchange Commission filing, when Onyx refused that condition, Amgen cut its offer by $9 per share. The companies eventually settled at $125 per share.  
 
Most analysts agree that the high-figure deal gives Amgen good leverage.
 
"From a fundamental standpoint, this deal adds revenue growth and earning accretion," says Mike Yee, an analyst with RBC Capital Markets. "But it also adds other things. Amgen is perceived as an unsexy biotech. Adding Onyx adds a new cancer drug to its portfolio. It also shows that the company is making efforts to turn the Titanic around and begin picking up growth."
 
Other analysts, however, are skeptical of how the merger plays into the bigger industry picture.  
 
"What it tells us about the state of drug development is not happy," writes Bloomberg columnist Megan McArdle. "This represents two trends in pharma these days: endless agglomeration and oncophilia. The serial mergers, like this one, are meant to plug holes in research pipelines. They do that—but you can also make a plausible argument that the resulting megafirms have lower research productivity than multiple smaller firms, because mergers are traumatic, and you end up with so many layers of management between the chief executive officer and the research bench."  
 
The transaction has been approved by both companies' boards and is expected to close in the fourth quarter, but in a complaint filed in California state court on Sept. 3, investors of Onyx claim the company was undervalued and that the merger is "infected by numerous conflicts of interest which hamstring the ability" of Onyx directors from "fulfilling their fiduciary obligations to the company's shareholders." According the complaint, Onyx's directors served on the board of a "de-facto Amgen subsidiary" or relied on Amgen to fund their organizations, and the transaction is also tainted by relationships between Onyx CEO N. Anthony Coles and members of Amgen's board. The investors also allege that the merger agreement contains provisions benefiting Amgen that discourage third parties from submitting superior offers—to the detriment of Onyx's shareholders.  
 
At press time, there was no word on how the merger will affect Onyx's 800 employees.
 
"Employment-related decisions have not been made at this point in the process," Onyx said in a statement.
 
Code: E101301

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