Amgen’s Alexion Acquisition: Does It Make Sense?

On August 21, Spanish website Intereconomia reported that Amgen (AMGN) would be announcing its acquisition of Alexion Pharmaceuticals (ALXN) in the next few days. The deal is expected to price Alexion at $200 per share.

Yesterday, Mizuho analyst Salim Syed backed the feasibility of the deal in a note. Syed reiterated a “neutral” rating on Alexion Pharmaceuticals and set its 12-month target price at $212. Following this news, Alexion’s share price rose 7.53% and closed at $123.49 yesterday. It closed at $203.42, 0.25% lower than its previous close.

Amgen is struggling with patent expiries

Amgen is one of the few companies in the pharmaceutical sector with impeccable earnings records. The company has surpassed consensus revenue estimates 14 times in the last 16 quarters. It’s also outdone the consensus non-GAAP EPS estimate 15 times in the last 16 quarters. In the second quarter, Amgen reported revenue of $5.87 billion, a YoY (year-over-year) fall of 3.10%. However, this was $193.53 million higher than the consensus estimate. The company also reported non-GAAP EPS of $3.97 in the quarter, $0.39 higher than the consensus estimate.

Amgen, however, is facing a slew of patent expiries for the majority of its mature blockbuster brands, including Neupogen, Neulasta, Epogen, Aranesp, Enbrel, and Sensipar. In the second quarter, these legacy brands accounted for more than 60% of the company’s product sales. In the same quarter, Amgen raised the lower end of its fiscal 2019 revenue guidance. It now expects its fiscal 2019 revenue to be $22.4 billion–$22.9 billion. It previously guided for $22.0 billion–$22.9 billion. To know more, read How Amgen’s Revenue Is Trending This Year.

Amgen is working to offset the expiries

Amgen has been trying to offset the negative impact of patent expirations through new product launches. Oncology drug Kyprolis and bone health drug Prolia have proven successful commercially. However, the company has yet to see significant revenue contribution from other new drugs such as Repatha, Aimovig, Evenity, Blincyto, and Imlygic. These new drugs likely won’t be able to reach the revenue potential of Amgen’s legacy brands.

At the end of the second quarter, Amgen had $21.8 billion worth of cash and $30.6 billion worth of debt on its balance sheet. The low interest rates in the US and international markets make this an opportune time to raise capital cheaply. Amid this backdrop, it makes sense for Amgen to acquire leading rare disease player Alexion Pharmaceuticals.

Alexion faces significant downside risk

Alexion Pharmaceuticals also has a history of robust financial performance. The company has surpassed consensus revenue estimates ten times in the last 16 quarters. The company has also beaten consensus non-GAAP EPS estimates 14 times in the last 16 quarters. In the second quarter, Alexion reported revenue of $1.20 billion, a YoY rise of 15.15%. These results were $27.86 million higher than the consensus estimate. The company also reported non-GAAP EPS of $2.64 in the quarter, $0.30 higher than the consensus estimate.

Soliris and Ultomiris

Soliris is Alexion’s key revenue driver. The drug reported revenue of $980.8 million in the second quarter, a YoY rise of 9%. The revenue increases of its rare metabolic disease drugs Kanuma and Strensiq have been below its expectations. To learn more, read Alexion’s Soliris Continues to See Growth.

With biosimilar players racing to develop cheaper versions of Soliris, Alexion’s overreliance on this franchise presents a significant risk to its growth potential. Soliris is set to lose its composition of matter patent in the US in 2021 and in Europe in 2020.

To reduce the impact of upcoming generic erosion, the company has launched Ultomiris. It’s working to convert PNH (paroxysmal nocturnal hemoglobinuria) patients from Soliris to Ultomiris. At the end of the second quarter, it had successfully converted 40% of PNH patients. The company is also awaiting the approval of Ultomiris in aHUS (atypical hemolytic uremic syndrome) indications by the Prescription Drug User Fee Act date of October 19. However, it’s too early for Alexion Pharmaceuticals’ investors to depend on Ultomiris despite the encouraging uptake of the drug.

Amid this backdrop, Alexion Pharmaceuticals faces significant downside risk. An offer price of $200 per share is a 61.96% premium to the company’s last closing price. Hence, it seems to be an attractive proposition for shareholders.

How does Amgen stand to benefit from the deal?

Following the deal, Amgen will become a prominent player in the rare disease space. The deal will add a blockbuster therapy to Amgen’s portfolio. Soliris’s revenue contribution will be sufficient to offset the negative revenue impact due to ongoing generic erosion for the next one to two years.

In the long run, Amgen can leverage its resources, infrastructure, and commercial experience to rapidly convert PNH patients from Soliris to Ultomiris. Amgen can also leverage its regulatory experience to rapidly advance Ultomiris’s label in newer indications. Finally, Amgen may deploy its legal experience to extend Soliris’s patent exclusivity. The company may also leverage its relationships with payers to reduce Soliris’s generic erosion rate.

Amgen’s and Alexion Pharmaceuticals’ valuations

Amgen and Alexion Pharmaceuticals are currently trading at forward PE multiples of 13.46x and 11.25x, respectively. The 23 analysts tracking Amgen have an average target price of $209.45 on its stock. This indicates a potential upside of 2.96% in the next 12 months. The 18 analysts tracking Alexion Pharmaceuticals have an average target price of $158.94 on its stock. This indicates a potential upside of 28.71% in the next 12 months.