Will Amgen Buy Out Biogen Idec?

| About: Amgen Inc. (AMGN)

By Tim Plaehn

Biogen (NASDAQ:BIIB) has seen itself as an acqusition target, while Amgen (NASDAQ:AMGN) styles itself an aggressive partner. In my opinion, the time is ripe for the two to merge and, therefore, a tie-up this year is likely. Investors could see significant price appreciation if they understand the reasons and valuations of these two companies. Large cap biotechnology companies Amgen and Biogen Idec posted significantly different results in 2011. Amgen investors saw their share values hover around break-even for most of the year until a final month rally resulted in a 16 percent gain for the year. Biogen investors should be pretty happy with a share value which was up almost 50 percent by the second quarter and finished the year with a 64 percent gain. Is it possible these two biotech companies could join forces and become a very large player in the overall pharmaceutical industry? Investors should know about key potential mergers in this area. In healthcare, a company like Amgen is looking for growth.

Over the past three years, Amgen has posted relatively flat revenue and net income growth. Net income per share growth during this period was primarily due to a decreasing number of shares outstanding after a series of share buy-back programs. In 2011, the company reported a 20 percent plus reduction in the sales of its anemia drug Epogen and those results have been a major factor in the flat sales. On top of the falling sales of the company's anemia drugs, Amgen agreed in the 2011 fourth quarter to pay $780 million to settle several lawsuits concerning sales and marketing practices by the company. A series of health warnings from the FDA concerning Amgen drugs, SEC investigations and congressional inquiries resulted in CEO Kevin Sharer at one point being singled out as one of he worst CEOs in the country and in another report, as one of the most overpaid. Shares remain undervalued, namely due to sluggish growth.

Biogen Idec has reported an average of 14 percent in revenue growth over the last five years. During that period net income has increased five fold, from $220 million to over $1 billion in profits, compounding at over 20 percent per year. The company posted strong results throughout 2011, on the back of blockbuster drugs treating neurological disorders, primarily multiple sclerosis. Company literature discusses a "A Transformation of the Company is Underway." This transformation consists of a streamlining of company structure and R&D, maintaining a strategic focus on its profitable markets and realigning the organization to support growth.

The big possible change factor in this comparison of one company – Amgen – stuck in a path of slow or no growth to one – Biogen Idec – with strong growth prospects is a pending change at the top levels of Amgen management. The company has announced CEO Sharer will retire in May 2012 and will step down as chairman of the board at the end of the year. Mr. Sharer has been CEO since 2000. He will be replaced in May by 48 year old Robert Bradway, the current president and COO. A change at the top may be a catalyst for Amgen to make a significant move to boost company fortunes, such as a takeover bid for Biogen Idec. With a $26 billion market cap, Biogen would be a 50 percent size boost for Amgen. Amgen management has already announced they are prepared to spend up to $10 billion in share buy-backs. Maybe that money would be better spent on a significant acquisition.

Amgen and Biogen Idec have significantly different product lines. Amgen is focused on blood disorders and cancer therapies while the Biogen products are aimed an neurological disorders. A merger of these two companies would force management to find ways for cost savings from two very different research & development departments. At this point, this merger supposition would seem to be more of a benefit for Amgen than for the Biogen Idec. One idea which may push companies like these two together is if the U.S. healthcare system becomes a place where only the largest and best capitalized pharmaceutical companies can compete. If the government gains more control over which drugs are prescribed and purchased, a company with a broader product base may have an advantage.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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