Third Point believes Amgen’s acquisitions should have done more



Questions to be addressed

Third Point Partners LP believes that Amgen, Inc. (AMGN) has failed to economically justify the returns on the acquisitions it’s made since 2002. The fund also questioned the halting of Amgen’s share repurchase program until 2016 to pay for the Onyx Pharmaceuticals acquisition.

Amgen product sales

Amgen acquires Onyx to enhance oncology portfolio

Faced with expiring patents and increasing competition for its blockbuster drugs, Amgen acquired Onyx to benefit from the latter’s innovative oncology portfolio and pipeline. Reports noted that Amgen’s Epogen is expected to see competition from Roche’s Mircera, while Neupogen and Neulasta faces competition from Teva Pharmaceutical Industries Ltd’s (TEVA) branded medication, Granix, and Sandoz’s biosimilar therapy.

The ~$10 billion acquisition of Onyx was financed with $8.1 billion in committed bank loans and a cash balance available in the U.S.

Onyx has a growing multiple myeloma franchise including Kyprolis (carfilzomib) for injection that was approved in the U.S. Plus, Onyx had three partnered oncology assets—Nexavar and Stivarga, co-developed with Bayer AG ORD (BAYZF), and palbociclib, co-developed with Pfizer Inc. (PFE).

Kyprolis’ FOCUS trial fails to show clinical benefit

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Third Point noted in its investor letter that “based on corporate filings, Amgen had concerns about Onyx’s lead compound, Kyprolis, and renegotiated to reduce the price. Since the acquisition closed, Amgen has disclosed that while the ASPIRE trial for Kyprolis met its clinical endpoints, its sister FOCUS trial failed to show clinical benefit and introduced potential concerns over renal‐adverse events.”

Kyprolis sees competition from Celgene’s Pomalyst

Shares of Amgen fell in August after it said the trial failed to meet its primary end goal of improving overall survival. Sanford Bernstein analyst Geoffrey Porges said the negative results from the FOCUS trial “place Kyprolis at a significant regulatory and competitive disadvantage” to Celgene Corporation’s (CELG) multiple myeloma drug, Pomalyst. Kyprolis generated sales of $146 million for the six months ended June, 2014. Porges expects Kyprolis sales to reach $425 million in 2015, and $800 million in 2017.

Third Point added that instead of acquiring Onyx, “Amgen could have accretively repurchased over 10% of its shares outstanding, at the depressed valuation of just 4x sales.” Amgen said it had $1.6 billion still available under its board-approved stock repurchase program as of June, 2014.

EBITDA growth and debt reduction could improve outlook

Fitch maintained its negative rating outlook on Amgen. It noted in a September ratings release that the company’s high leverage was further stressed by the acquisition of Onyx, which led to a leverage of 4.3x at the end of 2013. Fitch expects total debt leverage to fall to around 3.5x by the end of 2014, driven by a combination of EBITDA growth and debt reduction.

Despite the pressure from an aging drug portfolio, the ratings agency said it expects Amgen to grow. Specifically, it expects a compound annual growth rate of revenues of 2.7% in 2013 to 2018 “as it refreshes its product offering over the next few years with promising new therapeutics, notably in oncology and cardiology.”

The next part of this series will look at Third Point’s views on how Amgen can unlock further value.


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