February 4, 2023
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Despite critics, Amgen sticks to its game plan

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During its 42 years as a biotech company based in Thousand Oaks, Amgen has fiercely protected its independence, while rising to the top ranks of pharma companies, often by acquiring companies with drugs.

The blockbuster transaction announced on Dec. 12 to acquire Horizon Therapeutics fits that growth pattern and it matches up with the company’s independent streak.

In paying something like $116.50 per share in cash for Horizon, Amgen raised questions from analysts who suggested that taking on some $28 billion in new bank debt could test the limits of Amgen’s balance sheet. William Blair analyst Matt Phipps told Reuters the deal involved “significant debt.”

But this is also a transaction that has all the hallmarks of an Amgen deal, one that is building the company’s pipeline substantially without sacrificing the independence it has prized since its founding in 1980 by a venture capital firm and a group of intrepid scientists who saw opportunity in the Conejo Valley startup.

 By paying all cash, Amgen guarantees that the Horizon shareholders will not be receiving a significant stake in a stock swap. By my back-of-the-envelope math, a straight up swap would have given Horizon shareholders about 15 percent of Amgen, and also diluted Amgen’s shareholders.

Amgen can also chart its own future by keeping its options open. It can refinance the debt later if interest rates drop, issue stock or even issue convertible debt.

By my rough calculations, Amgen will be able to pay down the debt by using some of its historical $9 billion – $10 billion in annual free cash flow. It can also cut costs to free up more cash to pay the debt down faster. And the interest on its bank debt will be tax deductible, reducing the effective interest rate substantially.

Since he arrived at Amgen, CEO Robert Bradway has been a consummate dealmaker, driving transactions for a number of therapeutics, including Otezla, which turned out to be a big money maker for Amgen.

The Horizon deal fits in with that pattern and Amgen’s long history of focusing on treatments for inflammation and other serious diseases. It does not chase fads, like weight loss drugs, and it did not join the rush to acquire a COVID-19 vaccine, an area in which it has little experience.

There are two things about this deal that are worth noting from a broader perspective.

First, industries tend to consolidate at tops and bottoms. By doing a blockbuster deal now, Amgen is holding out the prospect that, with Horizon’s pipeline in its portfolio, its shares may be worth more in the future than they are today.

Amgen’s stock has been trading close to an all-time high, despite a double-digit decline in the S&P 500 this year. If you believe stocks are at a bottom and headed higher, the fact that Amgen has joined a flurry of recent deals could be a signal that there are better times ahead for equities in general.

Second, somewhere in the halls of the U.S. Treasury and in a few state capitols, there may be some quiet cheering going on. An all-cash deal for Horizon means a windfall in capital gains taxes that will be paid by U.S. shareholders.

A small slice of the $27 billion acquisition price is not likely to move the needle much on the U.S. budget deficit, but it could pave the way for more deals. And, as they say, a billion here, a billion there eventually does add up.