Horizon Therapeutics Acquisition: A Good Deal For Amgen Investors

Amgen (NASDAQ:AMGN) announced today that it will acquire Horizon Therapeutics for $27.8 billion. Amgen is one of the larger global pharmaceutical companies, but $27.8 billion is a rather large amount even for Amgen. Horizon Therapeutics (HZNP) saw its stock start rising back in early November on talk of this potential deal. As I write, it is trading up over 14% since the close of $97.29 on Friday, December 9, before the acquisition was announced. Amgen is trading down a bit as investors weigh the cash price (including interest costs) against the long-term potential. That is what this article will do: weigh the cash price against Horizon’s known revenue and potential for future profits from its extensive pipeline of clinical-stage therapies.

Amgen Background

Amgen is a large-cap pharmaceutical company. Its current market capitalization is $147 billion. Its annual revenue in 2021 was nearly $26 billion. It has an extensive portfolio of commercial drugs and is developing an extensive pipeline of potential future therapies. In Q3 2022 Amgen’s biggest seller was Enbrel, at over $1.1 billion, but that drug is already declining in sales due to generic and other competition. Amgen hopes to continue revenue growth as its older drugs see patent expirations, by increasing sales of newer drugs. Helping with that are, for instance, Parsabiv, which grew revenue 64% y/y to $100 million, and Lumakras, which grew revenue 108% y/y to $75 million. Its portfolio leans heavily to therapies for autoimmune diseases, osteoporosis treatments, blood disorder therapies, and, increasingly, cancer therapies. It currently pays a dividend with a yield of 2.8% and has a PE (FWD) of 15.77.

Horizon Therapeutics’ Q3 Results

Horizon Therapeutics Q3 2022 results showed net sales of $925 million and GAAP net income of $136 million or $0.58 per share. The company is based in Dublin, in the EU. Sales and net income did decline y/y from Q3 2021. Horizon ended the quarter with over $2 billion in cash. It announced a plan to repurchase up to $500 million of its shares. It raised its estimates for long-term sales of its therapies. It announced many pipeline developments, some of which will be discussed below.

Horizon Commercial Therapies

Horizon has a portfolio of 12 commercial therapies in two segments, orphan drugs, and inflammation. The preponderance of revenue comes from the orphan drug segment, and within that segment from six drugs: Tepezza, Krystexxa, Ravicti, Procysbi, Uplizna, and Actimmune. Here I will focus on the two largest revenue generators, Tepezza and Krystexxa, plus Uplizna, which has the fastest-growing revenue.

Tepezza sales declined y/y, but that was due to a supply disruption earlier in 2021 causing an unusually strong Q3 2021, not demand. Q3 2022 revenue was $491 million, which should be about normal, though Horizon believes annual ex-US peak sales should eventually exceed $1 billion, up from the prior estimate of $500 million. Tepezza is used to treat thyroid eye disease, a rare disorder. It was approved for sale in the U.S. in January 2020, so it should have a long life of revenue generation ahead. It is also in trials for label expansion.

Krystexxa had Q3 sales of $191 million, up 21% y/y. It is used to treat gout. It is mainly given to patients who are intolerant to other gout medications. While it is not being tested in other indications, it is in two Phase 4 trials, one to test a shorter infusion duration and another to move it to monthly dosing.

Uplizna had sales of $44 million in Q3, up 134% y/y, though that included a milestone payment from an international partner. It is a monoclonal antibody approved for neuromyelitis optica spectrum disorder. It is in Phase 3 trials for myasthenia gravis and IgG4-related disease. It was approved by the FDA in 2020 as an orphan drug.

Pipeline: HZN-825

HZN-825 is in two Phase 2 trials. One is for diffuse cutaneous systemic sclerosis, the other for idiopathic pulmonary fibrosis. It works by blocking lysophosphatidic acid receptor 1. It is oral and designed to block gene activation.

Pipeline: Dazodalibep

Dazodalibep is in Phase 2 trials for four indications: focal segmental glomerulosclerosis, rheumatoid arthritis, kidney transplant rejection, and Sjogren’s Syndrome. Basically, it reduces autoimmunity. It works by binding CD40L to T cells, blocking their interaction with B cells and thus their autoimmune propensity. Rheumatoid arthritis is a big money target, but it is also a very competitive one. RA is one of the main indications driving Amgen’s sales of Enbrel. So, it could possibly be an Enbrel replacement.

Pipeline: Daxdilimab

Daxdilimab is another potential blockbuster autoimmune disease modulator. It is a monoclonal antibody antagonist to ILT7, which depletes targeted dendritic cells. It is in Phase 2 trials for discoid lupus erythematosus, lupus nephritis, alopecia areata, and systemic lupus erythematosus.

Pipeline: HZN-1116

This antibody is being tested for effectiveness in autoimmune diseases in Phase 1 trials. HZN-1116 is an antibody that neutralizes FLT-3, in turn reducing dendritic cell activity.

Pipeline: ADX-914

ADX-914 is in a Phase 3 trial for atopic dermatitis, in collaboration with Q32 Bio. It is an anti-IL-7Ra antibody that blocks signaling in two immune pathways. It is in an additional Phase 2 trial in an undisclosed autoimmune disease.

Preclinical Pipeline

Little is known about the preclinical pipeline, but it falls into three categories, one for autoimmune diseases and two for gout, with possible multiple targets in each category.

Analysis and Conclusion

It seems that Horizon was originally built largely by buying clinical-stage therapies from other companies and then seeing them through to commercial approval. Now it has a platform generating its own candidates, based on well-characterized targets. It complements Amgen’s work in autoimmune diseases. The acquisition immediately adds to Amgen’s revenue and bottom line, but it also involves a high debt load. As pipeline candidates get through their trials, if they have positive results and get regulatory approval, the resulting revenue could grow very large by the end of the decade.

In Q3, Amgen acquired ChemoCentryx for $4 billion. That seemed like a big bite. The Horizon Therapeutics acquisition brings more risk with it because of its size. There are the usual risks of commercial and clinical-stage pharmaceutical development. Not all the pipeline candidates or indications are likely to get positive results. If commercialized, Horizons’ therapies will be up against the intense competition in the immunology space, both from established therapies and from new therapies from rival pipelines.

On the whole, I believe the benefits outweigh the risks for Amgen investors. On the downside, the debt load is going to come with a relatively high-interest rate. Amgen’s long-term debt was already nearly $39 billion. Free cash flow was under $3 billion in the quarter, for a run rate of about $12 billion per year. Hopefully, by the second half of the decade, free cash flow will be up significantly, making interest expense and debt repayment less of an issue. Hopefully, there will be some savings and synergies in combining the two companies. But I do not expect the Amgen dividend to increase any time soon. Forget significant share buybacks. I expect growth, but how much growth and how fast remain to be seen. I assess Amgen as now somewhere in the Hold to Buy range for longer-term investors, those who are likely to stay invested until the end of the decade or longer.