Amgen (AMGN -0.59%) CEO Bob Bradway said in the big biotech's second-quarter conference call last month that Amgen was "looking at ways to grow through business development." We now know one of those ways.
On Monday morning, Amgen announced that it was buying psoriasis and psoriatic arthritis drug Otezla from Celgene (CELG) for $13.4 billion in cash. This appears to be a relatively rare win-win-win kind of deal. Here are the three winners, ranked by which company I think wins the most.
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1. Bristol-Myers Squibb
My view is that the biggest winner of all from the divestiture of Otezla is Bristol-Myers Squibb (BMY -0.87%). Without selling Otezla, the company's pending acquisition of Celgene would be a no-go due to Federal Trade Commission (FTC) concerns.
I have maintained for quite a while that BMS needs Celgene more than Celgene needs BMS. The sale of Otezla should clear the way for this much-needed acquisition to win FTC approval.
It also certainly helps that BMS will get its hands on the $13.4 billion in cash. The Celgene acquisition will cost the big drugmaker over $35 billion in cash, plus close to that amount in BMS stock. Amgen's purchase of Otezla will reduce the up-front hit from the Celgene transaction, which is expected to close by the end of this year.
2. Amgen
I think that Otezla is a perfect fit for Amgen. The big biotech already has an established immunology sales team that promotes Enbrel and Humira biosimilar Amgevita. But Enbrel is past its prime, while Amgen can only market Amgevita outside the U.S. for now. Bob Bradway was exactly right with his statement that Otezla "fits squarely within our portfolio and complements our Enbrel and Amgevita brands."
This deal is also an immediate winner financially for Amgen. The company expects tax benefits that have a net present value of $2.2 billion, bringing its net cost down to $11.2 billion. Otezla made $1.6 billion last year. Amgen will get an annual return of at least 14% from its investment right out of the gate if Otezla makes the same amount of sales as it did last year.
The great news for Amgen is that Otezla's sales are likely to keep growing by low double-digit percentages over the next five years. As we saw with Amgen's Q2 results, the company is at best treading water right now with no or very little revenue growth. Adding Otezla to its lineup gives Amgen a new blockbuster drug for which sales are growing briskly. Amgen needed the boost that this transaction gives.
3. Celgene
You might be surprised that I view Celgene as the lowest-ranked winner from the sale of Otezla. My reasoning here is that Celgene's shareholders simply don't get as much from the deal.
First of all, the $13.4 billion received from Amgen will soon be in Bristol-Myers Squibb's pocket. Also, the divestiture of Otezla didn't alter the terms of the acquisition of Celgene by BMS. In addition, remember that I don't consider the BMS deal to be as important to Celgene over the long run as it is for BMS.
Don't get me wrong, though: Celgene is still a winner. Anything that serves as a catalyst to BMS stock will benefit Celgene shareholders when the acquisition closes. Also, Celgene's share price would have almost certainly sunk temporarily had the company not been able to sell Otezla or received a disappointingly low price for the drug.
The big question
Today's announcement of the sale of Otezla to Amgen removes what's likely the only remaining key hurdle for BMS to buy Celgene. I think this acquisition is pretty much in the bag. But the purchase of Otezla does raise one big question for Amgen: Are any other deals coming soon?
There have been some rumors floating around that Amgen might acquire Alexion Pharmaceuticals. With Alexion's shares falling on Monday on no other news, it's a safe bet that investors don't think this buyout will materialize now that Amgen is scooping up Otezla.
I wouldn't totally rule out Amgen making another acquisition, though. The company still has a big cash stockpile and a strong cash flow. However, forking over $13.4 billion for Otezla probably does lower the chances that Amgen will tackle an acquisition the size of Alexion.
