Large companies often turn to acquisitions to jump-start revenue and earnings growth or to speed up research and development, among other reasons. However, these moves aren't always successful, so it's essential not to invest in a stock simply because of a high-profile buyout.
With that said, let's look at the case of biotech giant Amgen (AMGN 0.22%), which just closed a blockbuster acquisition of Horizon Therapeutics. The transaction didn't go as smoothly as both companies might have hoped. But now that it's in the books, should you add Amgen's shares to your portfolio?
What does Horizon Therapeutics bring?
Amgen dished out about $28 billion in cash, financed with debt, to acquire Horizon Therapeutics. The deal initially ran into some regulatory problems when the U.S. Federal Trade Commission (FTC) raised antitrust concerns. Fortunately, the FTC came to an agreement with Amgen and Horizon, which allowed the deal to go through. But why did Amgen decide to spend so much on this transaction?
The biotech has been suffering from slow revenue growth in recent years. And while it's betting on its pipeline to pull it out of trouble, this hasn't happened yet. The company's most recent approvals have failed to jump-start top-line growth substantially.
AMGN Revenue (Quarterly YoY Growth) data by YCharts.
Enter Horizon Therapeutics, a company with a lineup of about a dozen medicines. In the second quarter, Horizon's net sales were $945 million, an 8% year-over-year increase. Amgen expects the deal to positively contribute to revenue and growth in non-GAAP earnings per share starting in 2024.
However, Horizon has growth problems of its own. In the second quarter, its crown jewel and best-selling medicine, Tepezza, which treats thyroid eye disease (TED), experienced a sales decline of 7% year over year to $445.5 million. The company blamed a complicated drug reimbursement process for the drop. Management is working to address the issues, though, and Tepezza recently earned an updated label in treating TED regardless of disease activity or duration.
Horizon Therapeutics is also looking to expand into new territories. Tepezza was recently approved in Brazil -- the first country outside the U.S. to grant it the green light -- and aced a phase 3 study in Japanese patients. With Amgen's backing, Tepezza's launch in other territories could be faster. Still, it's important to keep Tepezza's struggles in mind.
Amgen will also inherit Horizon Therapeutics' more than 20 programs, adding to its pipeline.
What will happen to the dividend?
Among Amgen's best selling points is its dividend. The company has raised its payouts by a solid 61% in the past five years and currently offers a competitive yield of 3.2%, well above the S&P 500's average of 1.6%.
The acquisition of Horizon Therapeutics won't change management's commitment to returning capital to shareholders. Amgen expects dividend growth to continue thanks to both entities' ability to generate free cash flow, which it thinks will help take care of both the payout and the debt it took on to complete the transaction. In my view, investors have nothing to worry about on this front.
Amgen isn't for everyone
Amgen's acquisition will help it substantially expand and diversify its lineup and pipeline. This will turn it into an even stronger biotech company that can pump out new approvals regularly. And it should continue performing relatively well regardless of economic conditions, thanks to its offering critical and sometimes lifesaving drugs to patients.
However, Amgen won't appeal to every investor. For instance, growth-oriented ones will likely remain unimpressed with the company even after its acquisition. But for income-seeking investors, the stability of Amgen's business and its regular and growing dividend would seem to make it a screaming buy.
