Big biotech’s latest takeover, Amgen’s (NASDAQ:AMGN) $10.4bn buy of Onyx Pharmaceuticals (NASDAQ:ONXX), would not have happened had the target company’s chief executive, Tony Coles, not sensed just how far he could push the bidder while keeping a level head and refusing to buy into the worst excesses of sellside hype.
Onyx had earlier rejected Amgen’s indicative $120-per-share approach, but in the event it took only another $5 for minds to meet. At a time when unrealistic investor expectations are pushing many of biotech’s assets beyond the limits of affordability, this shows the importance of pragmatism for bankers who really want to get deals done.
Amgen’s share price reaction - up 8% yesterday - also indicated how fearful its investors had become about their company overpaying. Estimates of Onyx’s value had fluctuated from $130 to as much as $160 a share, and with Sunday’s news that a $125 deal had been agreed Amgen shareholders breathed a sigh of relief.
Net of Onyx’s $750m gross cash, and considering the group’s 73.4m shares outstanding, the takeover is worth $8.4bn. But on being completed the move will lead to 5.8m shares being issued to redeem a convertible debt, plus another 5.5m under stock option schemes, valuing the takeover at around $10.4bn.
The 4% convertible note actually had a face value of just $230m, and it was carried on the balance sheet at $180m. The price at which it will convert proves that it is not only equity holders who will benefit handsomely: holders of Onyx equity since August 2009, when the note was issued, stand to make a fourfold return, while the value of the debt has climbed by an only slightly less impressive 220%.
Amgen’s move was also driven by strong economic tailwinds. To finance the Onyx acquisition the group will borrow $8.1bn at 104 basis points over Libor, which in the current climate is equivalent to a staggeringly low annual interest rate of 1.4%.
Heavy but fair
In the end, as we had suggested, Amgen’s initial $120 per share was heavy but fair, and bidding significantly above this proved hard to justify (Coles presses home Onyx’s advantage, July 1, 2013). Mr Coles took a rational view, while Amgen benefited from the absence of other interested parties.
Much was written about valuation scenarios for Onyx, and as was to be expected its multiple myeloma drug Kyprolis ended up playing a starring role, with ISI Group’s Mark Schoenebaum estimating that it accounted for half to two thirds of the takeover’s value.
This fact alone makes Onyx’s 2009 purchase of Proteolix, Kyprolis’s originator, look like one of the biotech steals of the decade. Three years ago Onyx was still calling Proteolix a small acquisition, but it is now up there with Biogen Idec’s (NASDAQ:BIIB) 2006 purchase of Fumapharm for $215m; with Fumapharm came the multiple sclerosis drug Tecfidera, which is now one of the industry’s biggest assets.
Amgen’s announcement also cited the potential of Onyx’s R&D projects palbociclib - which some analysts had recently pinpointed as an underrated asset - and oprozomib, an oral phase II blood cancer agent that had also come from Proteolix. The latter might extend the lifecycle of the Kyprolis franchise.
Before this becomes an issue, of course, data will come from two Kyprolis studies that will determine the drug’s approvability in Europe. It seems that Amgen is pretty sure which way the coin will land.