Amgen’s Buy Mode

Amgen Inc. made two major investments to expand its global reach and bolster its portfolio in the past couple months, purchasing Celgene Corp.’s psoriasis drug, Otezla, for $13.4 billion in cash, and buying a 20.5 percent stake in BeiGene, a Chinese cancer biotech company, for $2.7 billion in cash. The Thousand Oaks biotech announced the acquisitions roughly a month apart – Otezla in August, and BeiGene in October. Amgen is expected to close on the Otezla deal before year-end, the company said, and early 2020 for BeiGene. Amgen shares increased since the Otezla deal was announced Aug. 26, moving from $205.41 that day to close at $216.40 on Nov. 6. During a conference call with investors Oct. 31, Amgen executives laid out its strategy behind the decision to acquire a portion of the Chinese biotech, citing its need to become a stronger global player in health care and recognizing China as the world’s second largest pharmaceutical market. In addition to expanding its oncology presence in China, Amgen will continue to commercialize its non-oncology portfolio in the country with BeiGene distributing its cardiovascular and hematologic treatments. “We’ve been building our presence in China organically in recent years, and we’ve had two products approved and launched there, Repatha and Xgeva,” Robert Bradway, chief executive of Amgen, said during the conference call. “At the same time, we’ve been proactively seeking strategic opportunities that would enable us to have a much bigger impact in China much sooner than we would have been able to realize on our own. We see BeiGene as a very attractive opportunity and we’ve been very much impressed with what BeiGene has accomplished, particularly with research, clinical development and commercialization.” The Beijing-started biotech took responsibility for Celgene’s immune-oncology products in 2017, Bradway noted during the call. According to a statement from Celgene in July 2017, the company entered into a collaboration with BeiGene to advance solid tumor studies, with BeiGene acquiring Celgene’s commercial operations in China and commercial portfolio, including cancer drugs Abraxane, Revlimid and Vidaza. Christopher Raymond, an analyst who covers Amgen for PiperJaffray, echoed the company’s position that the BeiGene deal will accelerate international expansion, but also remarked on a lesser financial burden for Amgen’s research and development division. As part of the collaboration, BeiGene will contribute $1.25 billion toward oncology research for 20 of Amgen’s pipeline products. Raymond believes the decrease in R&D expenses will be offset by “headwinds related to equity accounting.” Investors should expect a 20-cent decrease in earnings because of the R&D void, he added. The full financial impact of the deal has yet to be determined, but should become clearer in the first quarter of 2020, when the deal is expected to be finalized. “Given BeiGene’s substantial existing oncology footprint in China, we see BeiGene as a natural fit as a strategic partner for Amgen, though (we) await additional clarity on the financial impact before incorporating this into our model,” Raymond wrote in the report. Otezla purchase Amgen wants to purchase Celgene’s psoriasis drug to enhance its geographic presence, as well as strengthen the company’s inflammation portfolio, Bradway said during the company’s earnings call. Through Otezla sales, Amgen will enter 50 more markets worldwide. Since its approval in 2016, it has become Celgene’s third-biggest drug, steadily climbing from $500 million in 2015 to a projected $1.9 billion this year, according to a Reuters report. “We expect the Otezla acquisition to close before the end of the fourth quarter, giving us an asset that will add to our long-term growth. Of course, we look forward to welcoming the Otezla team to Amgen,” added Bradway. The purchase clears the way for New York-based Bristol-Myers Squibb’s $74 billion offer to purchase Celgene by the end of the year. Bristol-Myers has a competing treatment it is developing and concerns were raised by the U.S. Federal Trade Commission after the deal between Celgene and Bristol was announced. It’s unclear yet whether Amgen would run into the same issues with the FTC, given its biosimilar version of AbbVie’s Humira, an anti-inflammatory psoriasis drug, and Embrel, which treats arthritis and psoriasis. If the purchase goes off without a hitch, the combination of Otezla, Aimovig and Embrel sales could provide an impressive revenue boost, according to analysts at RBC Capital Markets. Amgen’s research and development investment for 2020 is expected to increase by $500 million as Amgen invests in Otezla indications and other pipeline programs, Bradway said. Analysts on average see the Otezla deal as a counterbalance to Amgen’s expected sales declines as some of its drugs lose patent protection and face competition from biosimilar drugs. Also, Otezla will bring in nearly $3 billion in annual sales by 2024, according to reports from Reuters and Fierce Pharma. Do Kim, an analyst with BMO Capital Markets, asked some questions during the call about potential disruption in ongoing commercial operations of Otezla, given the time it takes to fully onboard a drug and its components. Executive Vice President of Global Commercial Operations Murdo Gordon said the company has made conditional offers of employment to those closely tied to drug manufacturing, and have been “really pleased by the uptake” to continue operations for Otezla. “From Japan to the U.S. and the rest of the world, we see an eager, highly engaged workforce that’s very interested in joining Amgen,” added Gordon. “I would say that we expect minimal disruption, if any, to ongoing operations. I mean, we did set patient continuity as our north star in this integration and everybody has been very focused on following that.” Other analysts like Cory William Kasimov at JP Morgan Chase & Co. wondered during the conference call if Amgen would pump the brakes on other deals. Bradway answered the question, of course before the BeiGene announcement, by saying things would be business as usual for Amgen: “We’re continuing to look for ways to invest internally, externally, and while also growing the dividend by next year.”