Biotechnology deals are always a gamble, and, on the face of it, Amgen’s $28 billion purchase of Horizon Therapeutics looks both risky and pricey. But large pharmaceutical companies can help catapult smaller drug firms into a new stage of development. Investors in the $150 billion drug buyer should give it the benefit of the doubt.
Amgen is largely buying Horizon for a drug named Tepezza, which helps a thyroid disease that affects eyesight. In the third quarter, the drug contributed more than half of the company’s revenue. The trouble is that growth in the medication’s sales has stalled. Revenue in the most recent quarter was $491 million, a decline from the first quarter.
Slowing growth is not what a company wants to see in a relatively new drug. And if the trajectory remains, Amgen will have paid too high a price. Though Horizon’s stock price had halved between April and November, when news of a potential deal leaked, Amgen is paying a 48% premium to that low price. Meanwhile, the NASDAQ Biotechnology Index is down 4% year to date. Plus, Amgen is paying all cash.
Still, analysts think that Horizon’s revenue should grow 12% annually. The company is expected to earn around $2 billion in operating profit in 2024. And Amgen thinks the combination will eventually generate $500 million of savings. Chalk this up and assume the combined company keeps Amgen’s low 12% tax rate, and the result is an 8% return on investment by 2024, well above the industry’s weighted average cost of capital of 5%, according to data from NYU Stern School of Business.
There’s a good chance Amgen can do even better. Approximately 1 million Americans are diagnosed with the disease the drug treats every year, and it costs $14,900 a vial. Simple math suggests revenue could far exceed estimates. Plus sales have been impacted in part by supply chain hang-ups, but the company also has to convince surgeons that prescribing the medication is better than surgery. Amgen’s broad sales network and international presence can help both.
AstraZeneca’s $39 billion purchase of Alexion in 2020 shows how a larger firm can bring a pharma firm to the next level. Sales in Alexion’s drug this year should be $7 billion, a 16% jump from where they were when AstraZeneca bought it. If Amgen similarly helps Horizon, its deal will look like a reasonable wager.