Amgen (AMGN) has recently announced its acquisition of Onyx Pharmaceuticals (ONXX) for $125 per share or an equivalent of $10.4B. When the news was announced on August 25, AMGN stock jumped from $105 to $110. With the stock currently hovering around $110-$112, we are curious to evaluate the intrinsic value for AMGN after the Onyx acquisition. In other words, we would like to know how much the acquisition will add to Amgen's revenues and earnings going forward, and most importantly, how it will impact AMGN's intrinsic stock value.
We have previously covered both Amgen and Onyx Pharmaceutical (Link 1, Link 2, Link 3). Our latest analyses suggest that AMGN has an intrinsic value of $117 per share, due to 4 factors: faster revenue growth from its new products Xgeva and Prolia; the termination of Enbrel's partnership with Pfizer; the less significant impact of the patent expirations for Epogen and Araqnesp; and its move to take on the biosimilar market (Link 1, Link 2). ONXX has an intrinsic value of $118, so the $125 per share offer is a 6% premium to the stock (Link 3). With the acquisition, Amgen will be able to add Onyx' revenues to its income statement starting in 2015.
The Onyx acquisition is a smart strategic move for Amgen for several reasons. First, Onyx has a growing multiple myeloma franchise. The sales of Kyprolis, which was approved in 2012, will enter exponential growth phase in the coming years, with the help of Amgen's global sales capability. The revenues of Kyprolis will improve Amgen's revenue growth. They will add about $600M (2014), $900M (2015), $1.3B (2016), and $1.8B (2017) to Amgen's revenues.
Second, Onyx will bring in its drug pipeline, including palbociclib and other proteasome inhibitors, to Amgen's. It is important to note that Amgen's drug pipeline is rather weak compared to other biopharmaceutical companies, such as Novartis (NVS) and Johnson & Johnson (JNJ). Its most advanced drug candidates in phase 2 and phase 3, OncoVex and AMG386, are high risk projects which may not pay off if the clinical data is disappointing. Meanwhile, Onyx's drug candidates have well-defined mechanisms of action, and thus a higher probability of success.
Third, Amgen will also receive royalties from sales of Nexavar (sorafenib) and Stivarga (regorafenib) from Onyx's original partner, Bayer Pharmaceuticals (BAYZF.PK). Although relatively small compared to Amgen's revenue ($17B), these royalties still amount to ~$500M per year.
To integrate Onyx's revenues into Amgen's financial report and capital structure, we made the following inputs into our proprietary financial model.
1. Onyx's revenue streams are added to Amgen's starting in Q4 2013,.
2. With Amgen's sales network, we assume that Kyprolis sales will accelerate at higher rates. We project that revenues of Kyprolis will be $270M (2014), $486M (2015), $778M (2016), and reach $1B in 2017.
3. Amgen will finance the acquisition through both cash and debt. We assume that the deal is $5B cash and $5.4B debt. This will reduce cash holdings and increase interest expense going forward.
4. The acquisition will boost Amgen's earnings growth rate from 8.8% to 9.7%. Accordingly, we use a 5% long-term growth rate in the discounted cash flow model and derive an intrinsic value for AMGN as $131 per share.
The Onyx acquisition is a strategic move to expand Amgen's drug pipeline. It also increases the revenue and earnings growth rates for Amgen in the near term. The combined effect is an enhancement of AMGN intrinsic value to $131 per share.