February 7, 2023
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The top five financial truths in blockbuster Amgen-Onyx deal



For sheer size and scale, Amgen’s $10.4 billion purchase of South San Francisco-based cancer drug maker Onyx Pharmaceuticals dwarfs any recent deal in the Tri-Counties.

For size, let’s remember that Dole Food Co. is selling its entire self for about $1.3 billion and that Santa Barbara Bank & Trust parent Pacific Capital Bancorp, previously the region’s biggest banking company, sold last year for $1.5 billion.

For scale, it’s easy to forget that while the Onyx cancer fighting drug line has promise to deliver substantial revenue, perhaps $3 billion a year, for Amgen, it is what the company calls a “plug in” acquisition. Translation into simple English: the Onyx deal won’t replace Amgen’s blockbuster core drugs, which increase red blood cell counts and fight infection.

In order to understand what the Onyx deal actually means to Amgen, its shareholders and the 5,500 employees who work for the company at its Thousand Oaks campus, here are five financial truths behind the Amgen-Onyx deal.

• No. 1: Amgen can pay for Onyx faster than you can pay off your car loan. Because Onyx has considerable cash on hand, the final bill for the company is about $8.1 billion, including some cash and loans. But Amgen produces about $7 billion a year in earnings before taxes, interest and non-cash charges.

Even after taxes, interest and paying out 60 percent of earnings as dividends, Amgen can pay off the loans it is taking on to buy Onyx in three to five years. That’s probably faster than you will pay off your new Audi A-6.

• No. 2: If the Fed is printing money, offshore cash is no problem. Much has been made about the fact that Amgen, like Apple and other U.S. corporate titans, has $22 billion in cash on the books but that most of it is offshore and subject to big taxes if it is repatriated. But look how quickly a bank group led by Bank of America and JPMorgan Chase stepped up to loan as much as $8.1 billion. Because the Federal Reserve is artificially keeping interest rates super low, the banks are willing to make very cheap loans and lock in small profits, rather than chasing risk.

• No 3: The bond vigilantes are chasing emerging market deadbeats, not pharma giants. Amgen’s overall debt will equal its cash when this deal closes, one reason why rating agency Fitch put the company on a negative credit watch.

But the real heat on debtors is focused on emerging markets such as India where the rupee has plunged recently. In addition, it’s very hard to imagine how anything that happens in Damascus, Cairo or Mecca will impact Amgen debt holders. Fitch, incidentally, is sticking with its low-investment grade rating on Amgen.

• No 4: We might measure the success of this deal one buyback at a time. Amgen now pays a 47 cent per quarter dividend which is putting a lot of pressure on management to keep earnings up but also grow its revenue stream. It promises the Onyx integration will be profitable by 2015. One test for how successful Amgen’s execution will be is if it begins buying back stock again — according to Fitch it still has about $2 billion authorized to repurchase shares. Repurchases would increase earnings per share and reduce the cash needed to pay the dividend.

• No. 5. Mutual fund investors and California are going to get a windfall. As a late-stage pharma company, Onyx shares are almost entirely held by institutions or mutual funds, including Fidelity, Wellington, Vanguard and Wells Fargo — its executives hold a relatively small stake. However, any well-off shareholders in California will pay capital gains taxes from stock sales or mutual fund distributions at the 10.3 percent flat rate — or higher. Even a small bump in revenue would be very helpful to a state that is heavily dependent on capital gains generated from mergers and acquisitions to plug a persistent deficit.
We’ll revisit this deal from time to time to see now my financial truths are holding up.

• Contact Editor Henry Dubroff at hdubroff@pacbiztimes.com.