Big Pharma's Shoes Don't Fit Amgen
The differences between biotech and pharma have always been a bit arbitrary. They mostly amount to whether the company name has been around for a century or mere decades, and whether there's a "gen" or a "zyne" in there somewhere.
But the distinction is getting fuzzier as the biggest biotechs get pharma-sized in market cap and ambition. Amgen, for instance, is getting ready to engage in the hoariest of Big Pharma clichés. According to the Financial Times, it's seeking a major acquisition to boost its pipeline and sales prospects as some of its major cash cows lose patent protection. It's reportedly looking for something in the $10 billion range.
This would be the firm’s second big acquisition in the past few years, including buying Onyx Pharmaceuticals for nearly $9 billion in 2013. But it has spent less than $600 million on deals since then, even as the industry at large embarked on an M&A frenzy. Its last big purchase before Onyx was in 2001. Another acquisition of that size would be a departure from the small deals and partnerships it has pursued recently, and it comes at a competitive time.
One thing investors like about Amgen is its most pharma-like attribute: For years, it was the only biotech to pay a dividend (until this February, when Gilead also began to offer one). But the company now risks adapting one of Big Pharma's less-desirable habits: expensive buyouts that risk large chunks of capital and investor goodwill.
Asked for comment, an Amgen spokesperson referred to CEO Robert Bradway's comments on the October 28th earnings call. He said the company was "opening the aperture" to look at bigger acquisitions and that valuations are more attractive than they were a year ago, but still high. He added nothing specific.
Amgen would be the latest in a trend of biotechs becoming buyers instead of perennial targets. Celgene bought Receptos for $7.2 billion. Gilead is under pressure to use its increasingly massive cash pile. Even relative minnow Vertex has transferred from buyout candidate to potential dealmaker.
Everyone's chasing the same shiny object: a home run of the sort Gilead hit in 2011 when it acquired Pharmasset and its Hepatitis C drugs. At $11 billion, Gilead's deal was about the same size as the one Amgen is reportedly pursuing. Since then, the firm's market cap has grown by more than $100 billion, and sales have grown from around $2 billion to $8.2 billion last quarter:
That's the dream.
But for every Pharmasset there are dozens of deals that destroy value. Development-stage biotech acquisitions add a litany of possible failures to the normal ones that render so much M&A worse than useless. Firms have to value assets that are years away from hitting the market, usually at a large premium. Even late-stage drugs fail in clinical trials.
The road to every blockbuster drug is a minefield. Drugs can end up being approved for smaller populations than expected, have nasty side effects, or run into increasingly penny pinching payers and governments, all of which can lop chunks off of rosy sales forecasts.
For biotech firms with highly concentrated income streams, a big, failed acquisition is truly frightening.
That's why the sort of company Amgen is reportedly seeking -- one with a late-stage drug that it can get on the market rapidly -- is in high demand. Such assets have already been raked through by competitors, including Big Pharma, voraciously acquisitive specialty firms, and its own biotech peers.
Amgen is hardly desperate. The company has topped earnings estimates five quarters in a row, is successfully cutting costs, and just raised estimates again. Its arthritis drug Enbrel continues to be a bestseller. The cancer drug it got in the Onyx deal looks increasingly promising as a combination therapy. Its next generation drug for high cholesterol faces pricing pressure and has a similar competitor on the market, but looks like a possible blockbuster.
Amgen's fear of missing out is understandable. But the very fastest way to derail a good thing is through big, bad acquisition. If Amgen wants to keep swinging $10 billion bats, it can't afford to miss.
Update: An earlier version of this story incorrectly said that Amgen was the only biotech that offered a dividend. Gilead also started offering a dividend earlier this year.
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