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Shares of Amgen (AMGN) rose some 1.6% in Monday's trading session. The biotechnology company announced the acquisition of deCODE Genetics in a deal valuing the company from Iceland at $415 million.

The Deal

Amgen announced that it will acquire deCODE Genetics, a global leader in human genetics. The company which is based in Reykjavik was founded in 1996 and is a global leader in analyzing and understanding the link between genomics and disease susceptibility. deCODE has discovered genetic risk factors for dozens of diseases ranging from cardiovascular to cancer. Amgen will pay $415 million for deCODE in an all-cash transaction.

CEO Robert A. Bradway commented on the deal, "deCODE Genetics has built a world-class capability in the study of the genetics of human disease. This capability will enhance our efforts to identify and validate human disease targets. This fits perfectly with our objective to pursue rapid development of relevant molecules that reach the right disease targets while avoiding investments in program based on less well-validated targets."

Amgen did not provide much (financial) information regarding the deal. The company says that the deal does not require regulatory approval, and is expected to close at or before the end of 2012. Amgen's Board of Directors has already approved the deal.

Valuation

Amgen ended its third quarter with $25.4 billion in cash, equivalents and short term investments. The company operates with $26.5 billion in short and long term debt, for a modest net debt position of $1.1 billion.

For the first nine months of 2012, Amgen generated revenues of $12.8 billion. The company net earned $3.6 billion for the period, or $4.51 per diluted share. The company is on track to generate annual revenues of $17.2-$17.3 billion. The company could earn $6.50-$6.60 per diluted share, or roughly $5.1 billion.

The market currently values Amgen at $68.9 billion. This values the firm at roughly 4 times annual revenues and 13-14 times annual earnings.

Amgen currently pays a quarterly dividend of $0.36 per share, for an annual dividend yield of 1.6%.

Some Historical Perspective

Year to date, shares of Amgen have risen an incredible 40%. Shares started the year around $64 per share and steadily rose to fresh all time highs of $90 at the moment.

Shares of Amgen fell from highs of $85 in 2005 to lows of $40 in 2008. From that point in time, shares have more than doubled. Between 2008 and 2012, Amgen grew total revenues by some 17% to $17.2 billion. Earnings are expected to rise to $5.1 billion this year. Earnings per share are rising even more rapidly after the company retired roughly a quarter of its total shares outstanding over the past four years.

Investment Thesis

Shareholders of Amgen are enthusiastic about the deal, despite the little information available. The deal is especially interesting, as it allows Amgen to develop better targeted drugs. Amgen stresses that by acquired deCODE the company can more efficiently identify and confirm targets for future drugs developments. As such, the company hopes to drastically cut back on development costs. Costs savings could total tens of millions for each individual drug development process.

A key assets of deCODE is the huge database of genetic and medical information about Iceland's population, which is quite unique. The database can aid in figuring out patient's responses to new drugs.

Another plus point of the deal is that Amgen could use offshore cash balances to fund the deal, and thereby avoid repatriation taxes on foreign earnings.

Despite the fact that Amgen's shares have seen a great run this year, sending shares to all time highs, valuation multiples look fair. The company is valued at 13-14 times annual earnings, has plenty of liquidity, a strong balance sheet, and pays out a decent 1.6% dividend yield.

Shares continue to offer long term appeal and I would expect to see shares crossing the $100 mark in 2013. In April of this year, when Amgen acquired KAI Pharmaceuticals, I expected shares to test all time highs which they did. Trading at fresh all time highs, I expect shares to trade at $100 per share in the coming year.

Source: Amgen - Acquisition Of DeCODE Genetics Sends Shares To All Time Highs