Amgen Set the Record for the Biggest Biotech Acquisition Offer in 2022. Here's What Our Tools Say about the Stock.
With FTX founder Sam Bankman-Fried saying he "misaccounted" $8 billion in funds through his crypto exchange, Elon Musk's antics as CEO of Twitter making headlines almost daily, and a bit of holiday distraction thrown into the mix, it was easy to miss one of the biggest events in biotech in 2022.
In mid-December, Amgen Inc. (AMGN) announced it would spend $27.8 billion to acquire Horizon Therapeutics (HZNP), paying $116.50 per share.
The deal will expand Amgen's array of drugs for rare diseases. One treatment that will be added to Amgen's portfolio is Horizon's best-seller Tepezza, which treats eye bulging and double vision from thyroid eye disease.
U.S. regulators approved Tepezza in early 2020, and the drug quickly went on to generate $1.67 billion in 2021, accounting for almost half of Horizon's $3.23 billion in total sales that year.
Roughly a month before the deal, HZNP opened at $73.70 on Nov. 14.
As of this writing, in a sign that investors are confident that the deal will close, the stock price is trading at $113.50.
At this price, there isn't an attractive arbitrage opportunity to take advantage of if Amgen is going to pay $116.50 per share.
But what we can look into is what this deal means for Amgen and what our tools say about the stock before the ink on this deal fully dries.
Merger and acquisition (M&A) activity was worth $642 billion in Q3 2022, the lowest figure in a decade.
This makes sense, as sky-high inflation, supply chain issues, and fears of an economic slowdown had companies playing defense to preserve what they had instead of playing offense and making strategic buyouts of other firms.
But mega-purchases like Amgen's also make sense, especially in biotech, as they allow companies to acquire other firms with technologies or drug pipelines that could cost hundreds of millions or even billions of dollars to start from scratch.
Strategic acquisitions can also complement current projects as well as provide new revenue growth that can make up for divisions with slower revenue growth or expected losses.
For Amgen, the Horizon acquisition offers a little bit of everything.
Horizon's Tepezza was the first medication ever approved for treating thyroid eye disease (TED), so it falls into Amgen's focus of meeting high unmet medical needs, and is only approved for treatment in the United States.
But plans are to make Tepezza globally available, which could generate peak revenue of $4 billion.
In addition to Tepezza, Horizon has another moneymaker on its hands that'll likely soon be contributing to Amgen's coffers.
Krystexxa is a popular offering by Horizon that's used to treat uncontrollable gout, a form of inflammatory arthritis. Krystexxa sales totaled $565.5 million last year and are projected to reach $1.36 billion by 2028.
Amgen faces expected losses from its anti-inflammatory rheumatoid arthritis drug Enbrel, which is coming out from under patent protection in 2029. This means that other pharmaceutical companies will be able to manufacture and sell their own cheaper generic versions of the drug, taking market share from Amgen.
In 2021, Enbrel generated $4.35 billion in sales. This chart depicting Enbrel's sales from 2011 to 2021 reveals how very lucrative this drug has been for Amgen.
Source: Statista
Amgen will also soon lose patent protection on osteoporosis drugs Prolia and Xgeva, which accounted for $5.25 billion in sales in 2021.
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Because the acquiring company has to pay a large sum of money to acquire the target company, investors often react to an acquisition announcement by selling their shares of the acquiring company. We've seen a mild version of this with Amgen, as its stock has dropped 5.5% since the announcement of its Horizon acquisition on Dec. 12.
But because we can see what our tools are currently saying about AMGN and have outlined how this acquisition could benefit Amgen in the long term, you have an edge.
Our Health Indicator places this stock in the Green Zone, classifying it as a "buy."
In the notoriously risky biotech sector, AMGN stands out with its Volatility Quotient (VQ) of 19.62%, which is at the lower end of the "medium risk" category.
VQ Level Breakdown:
Up to 15% = Low Risk
15%-30% = Medium Risk
30%-50% = High Risk
50% and above = Sky-High Risk
Taking a deeper dive, AMGN matches four strategies from our Ideas Lab, including Low Risk Runners, which indicates the potential for more upside. Stocks that qualify for the Low Risk Runners strategy have begun a solid uptrend and then pulled back in price, but still have room to run.
AMGN fulfilled this condition by reentering the Green Zone on Oct. 3 after a brief pullback into the cautionary Yellow Zone.
AMGN also qualifies for the Best of the Billionaires strategy. This strategy sorts stocks based on how recently they entered the Green Zone and how many billionaires (among the two dozen billionaires we track in our Billionaires Club) own them. We've found that the more billionaires that own a stock, the more potential for growth and larger gains.
The Best of the Billionaires strategy has proven itself in backtests to outperform the S&P 500 more than 5 times over, as revealed in this chart comparing it with the standard Billionaires Club and the S&P 500.
AMGN is also considered a Dividend Grower, with an annual dividend yield of 2.97%.
Amgen has increased its annual dividend (paid quarterly) for the past 10 years. And in the last three years, the dividend has grown by an average of 10.10% per year. This includes the Covid years, when many companies paused dividends.
With the potential financial advantages the Horizon acquisition brings, along with what the TradeSmith algorithms reveal about this stock, AMGN looks fairly attractive.
But as always, know yourself as an investor and what opportunities fit your style and goals.
Take care,
Team TradeSmith
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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