Amgen's $13.4bn Otezla Buy Helps Bristol/Celgene Merger Close By Year-End
Executive Summary
Amgen sees opportunity to grow Otezla sales through new indications and additional ex-US launches. The deal depends on Bristol closing its Celgene acquisition, pending FTC clearance.
Amgen Inc. will add a revenue-generating drug with strong sales growth expectations to its portfolio via the $13.4bn purchase of Celgene Corp.'s Otezla (apremilast), the divestiture of which should pave the way for Bristol-Myers Squibb Co. to close its $74bn acquisition of Celgene by the end of 2019.
Amgen is buying the Otezla revenue stream at a crucial moment when its revenues are being hit by biosimilars and generics for some of its top-selling blockbuster products. (Also see "Amgen's Murdo Gordon On Generating Sales Growth In A Challenging Commercial Year" - Scrip, 26 Jul, 2019.) The transaction also comes at an important time for Bristol-Myers and Celgene, which need the US Federal Trade Commission (FTC) and other anti-competition regulators to sign off on their merger. The sale of Celgene's oral PDE4 inhibitor depends on FTC clearance of the Bristol-Celgene deal and the closing of that transaction by the end of this year. (Also see "Bristol Values Celgene's Hematology, Immunology Portfolio At $74bn, But Does It Price In Risk?" - Scrip, 3 Jan, 2019.)
The FTC required the sale of Otezla – approved for moderate-to-severe psoriasis, active psoriatic arthritis and oral ulcers associated with Behcet's disease – because of the drug's overlap with indications Bristol is pursuing for its small molecule inhibitor of tyrosine kinase 2 (TYK2) BMS-986165. Bristol's oral drug is in Phase III for psoriasis and Phase II for psoriatic arthritis, systemic lupus erythematosus, ulcerative colitis and Crohn's disease.
But while Amgen sells Enbrel (etanercept) and Amgevita, its Humira (adalimumab) biosimilar marketed in the EU – injectable TNF inhibitors indicated to treat psoriasis, psoriatic arthritis and other inflammatory diseases – both are biologics, not oral drugs. (Also see "Amgen’s Biosimilar Adalimumab First To EU Nod But No Launch" - Scrip, 27 Jan, 2017.) Celgene has positioned Otezla as a post-topical, pre-biologic option for psoriasis and psoriatic arthritis, which may be enough differentiation from Enbrel and Amjevita (adalimumab-atto) for the FTC to sign off on Amgen's purchase of the drug. (Also see "Celgene's Terrie Curran On Building, Broadening The I&I Franchise" - Scrip, 4 Apr, 2018.)
Amjevita is the company's US Food and Drug Administration-approved Humira biosimilar, but it will not launch in the US until 2023 under a settlement with AbbVie Inc.; Amgevita launched in the EU last year. (Also see "Biosimilar Humira Blocked Until 2023, But Time Could Clear Commercial Path" - Scrip, 28 Sep, 2017.)
'Unique' Opportunity To Buy 'Truly Innovative' Otezla
Amgen expects the net cost of its Otezla acquisition to be $11.2bn after the company realizes $2.2bn in tax benefits associated with amortizing the all-cash purchase over a 15-year period.
"As a longstanding leader in inflammation and having looked at a number of oral anti-inflammatories through time, we watched with great interest the success of Otezla, and having an opportunity to acquire a truly innovative and established success like this now while it's still at an early stage in its global lifecycle is really unique," CEO Robert Bradway said during Amgen's 26 August call to discuss the Otezla purchase.
Otezla sales totaled $1.6bn in 2018, and Celgene forecast $1.9bn for 2019 sales; the drug brought in $882m in the first half of this year, which was up 21.2% year-over-year. Amgen said it expects annual growth of at least low single-digit percentages for the next five years with the potential for additional growth from new indications and launches in new markets.
"Otezla is the first choice therapy for [psoriasis] patients not satisfied with topical therapies given its differentiated mechanism of action and established efficacy and safety profile," Amgen executive vice president for research and development David Reese said during the company's call. "In psoriatic arthritis, Otezla is positioned for use in patients early in disease and/or with moderate joint involvement who are unsatisfied with [disease-modifying anti-rheumatic drugs (DMARDs)]."
Also, since Otezla is an oral drug, "it provides a patient-friendly alternative to injections or creams," Reese said. He noted that the drug is approved in more than 50 countries, but marketed in only 32.
International Otezla Expansion Planned
Amgen intends to launch Otezla in those other markets where the company already has an established presence in autoimmune and inflammatory diseases or is working to build a presence – particularly via Amgevita, since ex-US revenues from Enbrel have dwindled due to biosimilar competition.
"We've been clear that international expansion is an important strategic priority for us, and Otezla, with approvals around the world, offers yet another attractive international growth opportunity, especially in a number of large European markets and Japan," Bradway said. "The timing of this deal is attractive for us as Otezla will fit well alongside our ongoing investments in our biosimilar Amgevita business and it will contribute as well to the growth of our recently established presence in Japan."
William Blair analyst Matt Phipps pointed out in a 26 August note that the biggest competition for Otezla will come from Bristol's TYK2 inhibitor BMS-986165, which delivered "impressive" Phase II results in psoriasis last year and is in Phase III clinical trials with two comparators – placebo and Otezla. Phase III data are expected for BMS-986165 in 2020, but Phipps forecast that Otezla will maintain significant market share in the pre-biologic setting for patients with milder psoriasis.
"As has been seen time and again with new drug launches in the treatment of inflammatory diseases, formulary placement is essential for gaining access to newly diagnosed patients, and patients who are stable on a current therapy are unlikely to switch to a novel therapy," he said. "We continue to believe BMS-986165 has blockbuster potential, but believe it has greater likelihood to gain market share initially from patients on biologics wanting to avoid injections or those who have suboptimal responses to current therapies."
Bristol's Benefits From Otezla Deal Are Three-Fold
While Amgen stands to benefit from bolstering its international presence in inflammatory diseases and boosting its revenue stream as sales for key franchises like Neulasta (pegfilgrastim) and Sensipar (cinacalcet) slump under the weight of biosimilar and generic competitors, Bristol also appears to benefit from the sale of the drug in multiple ways. (Also see "Amgen Explains How Big A Hit It May Take From Biosimilars, Pricing Pressures" - Scrip, 29 Jan, 2019.)
First, the transaction will allow for Bristol's Celgene acquisition to close before the end of 2019, which is on the earlier side of the companies' guidance of late 2019 or early 2020 based on FTC clearance of their merger.
Second, Amgen is paying more than the $10bn maximum that analysts expected for Otezla, which Mizuho securities analyst Salim Syed said in a 26 August note is a "best case" scenario for Bristol and Celgene. Syed said the deal makes sense for Amgen, but doesn't leave much room for the company to absorb the impact for Otezla if Bristol launches its TYK2 inhibitor as expected in 2022.
Third, Bristol will have more money to reduce its debt burden faster and maintain its credit rating. The company said it also will increase its stock repurchases to $7bn from a planned $5bn share buyback initiative. Even after that, it noted, Bristol still will have money to engage in further business development activities to boost its product portfolio.
A Deal Too Large Or Just Right For Amgen?
SVB Leerink analyst Geoffrey Porges speculated in a same-day note that the tax benefit that lowered Amgen's net cost for Otezla paired with competitive bidding for the drug probably drove the deal's value above analyst consensus. However, he did not see the price as so high that the deal wouldn't be positive for Amgen.
"With sales of $1.6bn in 2018, $2bn+ in 2020E and $2.45bn in 2021E, Otezla should certainly be immediately profitable for Amgen," Porges said. "Investors are likely to be skeptical about Amgen’s assertion of IP exclusivity for Otezla until 2028 in the US, but even with earlier generic introduction, for the total cost of the purchase (5.5x expected 2020 sales) Amgen has still secured incremental product sales, with a synergistic operational footprint. On this basis the transaction does not seem outrageously expensive to us."
Amgen's Otezla purchase, which it says comes with US patents protecting the product through at least 2028 in the US, includes both the drug and the sales and research teams involved with the asset. Otezla also is being investigated in scalp and genital psoriasis, mild-to-moderate psoriasis and in pediatric indications. (Also see "Celgene’s Positive Phase III Data For Otezla In Scalp Psoriasis Could Yield Broader Label" - Scrip, 9 Oct, 2018.)
Amgen anticipates that its sales expenses and its R&D costs will be higher than previously expected in 2020 based on expenditures related to Otezla. Analysts noted this could be a temporary spending spike, because the company may cut costs where Amgen's sales and R&D teams overlap with Celgene's Otezla activities. However, Bradway indicated during Amgen's call that there won't be an immediate reckoning.
"As transactions go, this has the potential to be more straightforward than most in that it doesn't entail a complex infrastructure integration or redundancy issues," the CEO said. "Teams joining us from sales and marketing, development, medical affairs and manufacturing, for example, will fit well with our existing infrastructure capabilities."
Amgen expects Otezla to be immediately accretive to its earnings in 2020 after the deal's late-2019 close. The company indicated confidence that the FTC will sign off on the deal and Wolfe Research analysts said in a note about Bristol that the parties must have gotten some indication from the regulator that their transaction would be acceptable before they consummated the deal.
While Amgen will finance the transaction with cash from its balance sheet – it had $21.8bn in cash and investments as of 30 June – the company does not expect the deal to dampen its ability to continue investing in its own R&D programs, acquire new assets or buy back shares from investors, Bradway and chief financial officer David Meline noted during the Amgen call.
Fitch Ratings left Amgen's credit rating unchanged, saying on 26 August that the all-cash deal still leaves the company with enough liquidity to maintain its BBB rating related to its $25.1bn in outstanding debt as of 30 June.
Amgen's stock closed up 3.2% at $205.41 on 26 August, while Bristol rose 3.3% to $48.11 and Celgene gained 3.2% to close at $97.