By Sameer Jain, Ishan Date and Michael Akullo (Wharton School), Fuh Zhe Yi, Ahaan Roychowdhury and Harold Parra Holder (University College London)
Photo: Pina Messina (Unsplash)
Overview of the deal
Target: Horizon Therapeutics
Total Transaction Size: $27.8bn
Announcement Date: 12/12/2022
Expected Closing date: H1 2023
Target advisors: Morgan Stanley and JP Morgan Chase Co. (financial), Cooley LLP and Matheson LLP (legal)
Acquirer advisors: PJT Partners and Citigroup (financial), Sullivan & Cromwell LLP and William Fry LLP (legal)
On December 12, 2022, Amgen Inc (NASDAQ: AMGN) agreed to acquire Horizon Therapeutics PLC for $27.8bn, making it the largest healthcare deal of the year. Amgen will pay $116.50 per Horizon share, a 19.7% premium above the stock’s closing price on December 9, 2022. Amgen has entered into a $28.5bn credit arrangement with Citbank and Bank of America as they plan to finance the deal through a mix of cash and debt. This acquisition marks Amgen’s second major biotech acquisition of the year in an effort to strengthen its rare disease pipeline by replenishing its rare autoimmune, and inflammatory disease portfolios.
It is estimated the combined entity could reduce pretax costs by approximately $500mn by the end of the third fiscal year following completion of the acquisition. On the revenue side, Jefferies estimates that Amgen could gain an additional $4bn by 2024.
“The acquisition of Horizon is a compelling opportunity for Amgen and one that is consistent with our strategy of delivering long-term growth by providing innovative medicines that address the needs of patients who suffer from serious diseases.” - Chairman and CEO Robert A. Bradway (Amgen)
Company Details (Acquirer - Amgen)
Amgen is a biopharmaceutical company known for developing innovative therapies for serious illnesses such as cancer, kidney disease, and autoimmune disorders. The company has a strong focus on research and development and also works to support patient access to its therapies and make a positive impact on the communities where it operates.
Founded in 1980, headquartered in Thousand Oaks, California, USA
CEO: Robert A. Bradway
Number of employees: 24,200
Market Cap: $142.1bn (as of 20/12/2022)
LTM Revenue: $26.3bn
LTM EBITDA: $13.4bn
LTM EV/Revenue: 6.4x
LTM EV/EBITDA: 12.5x
Company Details (Target - Horizon Therapeutics)
Horizon Therapeutics is a biotechnology company that focuses on researching and developing medicines specifically for rare diseases. Founded in 2008 by Timothy Walbert, who himself was a victim of a rare disease, Horizon Therapeutics has expanded to have 9 offices across the globe. Their best selling drug is Tepezza, which generated $1.7bn in sales during 2021, positioning itself as one of the most successful rare disease medicine launches in history.
Founded in 2008, headquartered in Dublin, Ireland
CEO: Timothy P. Walbert
Number of employees: 1,900
Market Cap: $25.8bn
LTM Revenue: $3.7bn
LTM EBITDA: $1.1bn
LTM EV/Revenue: 7.1x
LTM EV/EBITDA: 24.7x
Projections and Assumptions
The biopharmaceutical giant has announced plans to acquire Horizon Therapeutics, a pharmaceutical company, for $116.50 per share in cash. The deal is expected to close in the first half of next year and add to Amgen's earnings from 2024. The acquisition will give Amgen access to two fast-growing drugs, the thyroid eye disease treatment, Tepezza and gout treatment, Krystexxa which are expected to bring in $3.85bn and $1.36bn in sales, respectively, by 2028.
The acquisition will also allow Amgen to diversify its portfolio as it faces rising competition for its blockbuster arthritis drug, Enbrel and the potential loss of patents for other key drugs. While this deal will provide Amgen with several growing assets, it does come at the cost of significant debt that could stretch the company’s debt-to-core-earnings ratio. Amgen will finance the deal through debt and cash, with the help of a $28.5bn credit agreement with Citibank and Bank of America.
Amidst one of the worst sell-offs in the biotech sector since the early 2000s, Amgen will acquire Horizon Therapeutics for what some analysts consider to be a bargain. Equipped with blockbuster Thyroid Eye Disease (TED) treatment Tepezza, and a robust complimentary R&D pipeline, Horizon will likely be a worthwhile purchase for Amgen in the long term, as they expect the transaction to be accretive as soon as 2024 and lead to a reduction in pre-tax costs for over $500 million.
There have been some worries about Tepezza’s hold on the TED market after Viridian’s new drug shows promise in its latest trial - a potent risk given that Tepezza accounts for around 60-70% of Horizon’s valuation. However, Amgen is confident in its ability to enhance Tepezza’s life cycle and growth globally by leveraging its 20 years of experience within inflammation and nephrology.
Amgen believes that the peak sales potential of the product portfolio and pipeline is over $10bn , which will allow it to focus cash flows on capital allocation, dividend growth and innovations such as the subcutaneous delivery of Tepezza, allowing the drug to compete more effectively with future drugs that enter the TED market.
Risks and Uncertainties
Despite the revenue potential, Amgen may still have overpaid for this acquisition where they will be paying 45x 2021 EV/EBITDA. In comparison, the wider S&P Biotech Index is currently trading at 11.4 times earnings. To put it simply, the anticipated $500 million cost savings, including tax and capitalization, account for only 37 percent of the cash premium Amgen paid.
Furthermore, this acquisition would increase Amgen’s debt to approximately $56bn, resulting in a huge debt load. Amgen’s net debt-to-EBITDA ratio would also rise from 2.2x to 4.0x, which would mean that in a worst case scenario, the company may face difficulties paying off its financial liabilities. However, Amgen has emphasised leveraging the combined $10bn cash flow and secured a $28.5bn bridge loan to reduce debt leverage to current levels by the end of 2025.
Another uncertainty is the usual risk of commercial and clinical-stage pharmaceutical development in which not all pipeline trials will show satisfactory results and R&D is a costly activity. Even if successfully commercialised, Horizon’s products are expected to face intense competition in the immunology space, both from established therapies and new therapies from rival pipelines.
In conclusion, considering the risks, it may take a long time for Amgen to register a return on investment on this acquisition due to the relatively low success rate of clinical trials. That said, if done properly, the resulting revenue could grow very large in the second half of this decade.
“We have accomplished a tremendous amount for patients, their families and our customers, and created significant value for shareholders. Amgen is aligned with that commitment and passion and will continue to maximise the value of the current portfolio and pipeline and accelerate the ability to reach more patients globally” - Tim Walbert, Chairman, President and CEO (Horizon Therapeutics)