Next Step for Amgen Deal? Winning Over Wall Street
Discussions that led to Amgen Inc.’s $16-billion deal Monday to buy biotechnology rival Immunex Corp. began casually, over cocktails between chief executives.
From the famous sky lounge of the Mark Hopkins Hotel, 19 stories above San Francisco Bay, the two chief executives took in the panoramic views and mused about being at the top of the biotechnology world, or as Amgen CEO Kevin Sharer remembers, “if our two companies could come together in some way ....”
The vision shared by Sharer and Immunex CEO Edward V. Fritzky in that meeting 18 months ago took shape over the last six months, as the two hammered out details of the biggest biotechnology merger ever. Now they must sell skeptical investors on the deal--and the ability of Sharer’s newly minted management team to pull it off.
Sharer & Co. made modest headway Monday in a lengthy conference call with 500 stock analysts, fund managers and journalists. As the two-hour pitch ended, Amgen’s shares, which were battered last week on rumors of a deal, moved higher, closing at $59.49, up $3.46. Immunex jumped $3.44, or 13%, to $29.06. Both trade on Nasdaq.
“We’re seeing a nice early reaction,” said Sharer in a phone interview from New York, where the teleconference was staged. “We’re delighted.”
Later in the day, however, Moody’s Investors Service put Amgen’s $300-million long- and short-term debt under review for possible downgrade. The ratings service said the acquisition would reduce Amgen’s $2.4-billion cash hoard. Another concern, according to Moody’s, is whether Amgen will take on additional debt to finance the Immunex purchase.
“They have some selling to do,” said Philip Nadeau, a biotechnology industry analyst with SG Cowen in New York. “Some deals, from the beginning, fit together like a hand and glove. This is a little less obvious, and they will have to do a little work to make investors happy with it.”
Amgen, based in Thousand Oaks, has agreed to pay nearly $30 a share in cash and stock for Immunex, creating a company with annual revenue of $5 billion and 8,700 employees. The deal puts four of the most promising biotechnology drugs on the market today under one roof. And it combines Amgen’s manufacturing expertise with Immunex’s scientific know-how in the emerging field of anti-inflammatory drugs.
The centerpiece of the deal is Enbrel, Immunex’s successful rheumatoid arthritis drug. Sales of Enbrel should reach $750 million this year, but that is a fraction of what Amgen believes is possible. Sharer told investors that Enbrel sales could hit $3 billion by 2005 as new medical indications for the drug are found. That is $1 billion less than previously forecast by Immunex.
As part of the deal, Amgen will share profit from Enbrel in the U.S. and Canada with American Home Products, Immunex’s marketing partner and 41% stakeholder in the Seattle-based company. AHP will continue to co-promote Enbrel in the U.S. and retain exclusive international rights. AHP will own 8% of Amgen when the Immunex acquisition is complete.
AHP shares closed at $58.60, down 25 cents, on the New York Stock Exchange.
Sharer told investors that Enbrel will be competitive with new biotechnology drugs under development by Abbott Laboratories and Pharmacia Corp., neither of which are expected to be available to rheumatoid arthritis patients before mid-2003.
By then, Sharer said, an Enbrel factory under construction in Rhode Island will be up and running, easing a shortage of manufacturing capacity that limited sales of Enbrel. Immunex has been placing patients on a waiting list for the drug.
The deal is the first large acquisition for Amgen, a 21-year-old, conservatively run company built on internal growth. But some investors questioned whether the acquisition made sense, especially at the price Amgen seemed willing to pay.
Some analysts are concerned that the deal will distract Amgen from putting its full muscle behind Aranesp, a second-generation anemia treatment poised to go head-to-head against Johnson & Johnson’s Procrit. Procrit is J&J;’s version of Amgen’s first-generation anti-anemia drug, which is sold under a licensing deal.
Fariba Ghodsian, managing director of L.A. investment firm Roth Capital Partners, said she believes the acquisition will dilute Amgen earnings by 9% to 10% next year, cutting the company’s previous 20% growth projection in half. “I can’t say I am very excited about this deal,” she said.
But Carol Werther, an analyst with Adams Harkness Hill in Boston, called the acquisition a “steal for Amgen,” adding that Immunex has an oncology molecule in development that could produce $500 million in sales by 2005.
The deal must be cleared by the Federal Trade Commission and by shareholders of Amgen and Immunex. Sharer said Amgen expects the FTC to require divesture of Immunex’s Leukine, a drug that spurs formation of white blood cells and competes directly with Amgen’s Neupogen.
Analysts said it might be difficult to find a buyer for Leukine at a favorable price. Although Leukine is a profitable drug, with expected sales of $100 million this year in the oncology market, it is dwarfed by Neupogen, which has more than $1 billion in sales. And Amgen is readying a second generation of its product, which will make it more difficult for Leukine to compete.
Sharer doesn’t expect the FTC to challenge Kineret, Amgen’s newly approved rheumatoid arthritis drug. It is not as effective as Enbrel and probably will be used only in patients who aren’t helped by Enbrel and other existing treatments.
Since he assumed the top spot at Amgen in May 2000, Sharer, 53, has been busy remaking the company and filling key positions with outsiders. He tapped George Morrow, previously chief of Glaxo’s U.S. operations, to become head of worldwide sales and marketing. Another recruit, former Walt Disney Co. chief financial officer, Richard Nanula, is executive vice president for finance and an architect of the complicated Immunex deal.
Dr. Roger M. Perlmutter, whom Sharer hired away from Merck to head research and development at Amgen, served as an important catalyst for the acquisition. A former head of the University of Washington’s department of immunology, Perlmutter trained scientists at Immunex and is a scientific colleague of Doug Williams, Immunex research chief. Williams will become an Amgen senior vice president and continue to run its Seattle laboratory.
Peggy Philips, Immunex chief operating officer, will become an Amgen executive vice president, with continued responsibility for Enbrel.
Although the companies are competitors on two significant drugs, they have a common entrepreneurial temperament and a culture of “openness, trust” that will make the merger work, said Fritzky, who will join Amgen’s board as a non-executive director when the deal closes, probably in the second half of 2002.
But Amgen may have to sell employees of both companies on the deal, as well as investors. Ghodsian said Immunex and Amgen went head-to-head in oncology and, more recently, in rheumatoid arthritis, and it might take some time for the companies to mesh.
Moreover, the companies expect to reduce staffing by 5% to help realize savings of $250 million by 2004, jarring for two companies that have grown rapidly through internal expansion. But Sharer said Amgen will take pains to eliminate positions through attrition.
“We want to be sure to do this in a way that is fair and supportive,” he said.
