Amgen Wins Onyx, But Will The Deal Pave The Road To Transformation?

The addition of Onyx’s cancer drugs to Amgen’s portfolio will fill a near-term sales gap for the big biotech and reinforce the company as a major oncology player. But Amgen will need to execute expertly on the merger if it is to transform itself into a high-growth biotech.

Amgen Inc. won Onyx Pharmaceuticals Inc. in a $10.4 billion buyout, but it’s not clear yet if Onyx will be the fuel that ignites Amgen’s transformation into a high-growth biotech.

The Onyx acquisition’s success will depend on how Amgen executes on the merger. Securing global regulatory approval and reimbursement support for the key asset, the proteasome inhibitor Kyprolis (carfilzomib) for multiple myeloma, will be pivotal, as will be delivering synergies to the bottom line.

Longer term, pushing ahead Onyx’s pipeline assets could yield unexpected upside. Also, Amgen will need to connect the dots between Onyx and other recent acquisitions like the genetics firm deCODE genetics EHF and antibody platform company Micromet Inc., both acquired in 2012, if it is to establish itself as an oncology innovator, an ambition that has alluded the big biotech thus far.

Acquiring Onyx is a step in the right direction, if not necessarily a game-changer. The revenues Amgen will gain from Kyrpolis and Onyx’s other marketed drugs, partnered with Bayer AG, Nexavar (sorafenib) for liver and kidney cancer and Stivarga (regorafenib) for metastatic colorectal cancer and metastatic gastrointestinal stromal tumors, will fill a near-term revenue gap for Amgen.

The company’s own top-line has been under pressure as blockbuster brands like the anemia drugs Aranesp (darbepoetin alfa) and Epogen (epoietin alfa) and neutropenia franchise Neupogen (filgrastim) and Neulasta (pegfilgrastim) have matured. Those products also have faced competition from biosimilars in Europe and are expected to be early targets for biosimilars in the U.S., which will raise the commercial bar further for Amgen.

During a business review in February, Amgen’s management offered a lower forecasted revenue range for 2015 than it did for this year: $16 billion to $18 billion in 2015, down from $17.8 billion to $18.2 billion in 2013.

Credit Suisse analyst Ravi Mehrotra estimates Amgen’s pre-merger revenues at $18.05 billion in 2013, declining to $16.63 billion in 2017. The merger with Onyx would change that projected trajectory from $18.2 billion in 2013 to $18.7 billion in 2017. Other analysts predict a similar sales forecast for Amgen’s top-line including sales from Onyx. Therefore, the addition of Onyx fills the revenue void, but may not drive notable growth.

“We don’t think this deal will be viewed as transformative. It (almost) fills the 2013-2017 revenue gap that Amgen had, but does not provide true top-line growth,” Mehrotra said in an Aug. 26 research note. “This is our observation (versus criticism) and we would classify the deal more as a ‘stepping stone’ deal.”

The deal is expected to close in the fourth quarter and be accretive to earnings in 2015. Accretion will be driven by revenue from Kyprolis, not synergies, Amgen management said, although the company does expect to extract cost efficiencies over time.

UBS analyst Matthew Rodin predicted Amgen could realize as much as 46% cost savings by 2017 compared to Onyx on a standalone basis. “Key for the business combination is the overlapping sales force in oncology and limited Onyx dedicated R&D spend post-2016,” he said.

Amgen will finance the transaction with $8.1 billion in committed bank loans and the balance with cash available in the U.S. The company expects to continue to increase the dividend “meaningfully” over time.

Relying On Acquisitions To Build In Oncology

Onyx’s revenue stream will serve as a bridge for Amgen while it waits to launch new revenue generators currently progressing through the pipeline. The company has the PCSK9 inhibitor AMG 145 in Phase III development for high cholesterol, a drug investors are bullish on, as well as sclerostin inhibitor romosozumab, which also is in Phase III testing for osteoporosis. Each of those products could represent a blockbuster opportunity, depending on how late-stage data reads out and if the drugs reach the market (Also see "On Amgen’s Agenda: Bring Biologics To Primary Care" - Pink Sheet, 18 Feb, 2013.).

But beyond those potential blockbuster markets, Amgen’s new management team – installed in 2012 – has homed in on oncology as a therapeutic area of focus for the company, and as such, has set about fortifying the company’s cancer portfolio through acquisitions. The success of Onyx then will become either a legacy or cross to bear for Amgen’s new CEO Robert Bradway and his right hand, Executive VP of R&D Sean Harper.

Amgen’s Recent M&A Acitivty
August 2013	Onyx Pharmaceuticals	$10.4 billion	Cancer drug marketer
December 2012	deCode Genetics	$415 million	Private genetics technology firm
April 2012	KAI Pharmaceuticals	$315 million	Private developer of KAI4169 for secondary hyperparathyroidism in CKD
April 2012	Mustafa Nevzat Pharmaceuticals	$700 million	Family-owned generics firm with strong position in Turkey
January 2012	Micromet	$1.01 billion	Bispecific therapeutic antibody discovery platform and lead drug blinatumomab
April 2011	Bergamo	$215 million	Brazilian hospital drug supplier
January 2011	Biovex	$425 million in cash; $575 million in milestones	Private immunotherapeutics developer, including OncoVEX
Source: Elsevier’s Strategic Transactions Database

Onyx, with a portfolio of valuable assets, didn’t come cheap after all. The $10.4 billion purchase price, or $9.7 billion net of Onyx’s cash, makes the acquisition the largest for Amgen in over a decade, since the company bought Enbrel (etanercept) with the acquisition of Immunex Corp. in 2002 for $17.9 billion in cash and stock [See Deal]. It also is the most expensive biotech acquisition since Gilead Sciences Inc. acquired Pharmasset Inc. in November 2011 for a staggering $11.2 billion.

Despite the $10 billion-plus price tag, Amgen drove a hard bargain and the final acquisition price of $125 per share met a middle ground for both parties, offering a substantial premium for Onyx investors while leaving some upside for Amgen investors, who appeared pleased with the outcome of the months-long negotiation. Amgen’s stock jumped 7.7% on the news to close Aug. 26 at $113.75.

The purchase price is higher than the $120 per share offer initially put on the table by Amgen and rejected by Onyx June 28, but some investors and Wall Street analysts expected the company to sell for $10 to $30 per share more (Also see "Onyx Starts Acquisition Process; Price And Competition To Come Into Play" - Pink Sheet, 1 Jul, 2013.). Though the offer is lower than some may have anticipated, it reflects a 43.9% premium over Onyx’s closing share price of $86.82 on June 28 before Amgen’s original offer was disclosed. It also represents a 6.9% premium over the company’s closing stock price Aug. 23 after merger speculation fueled a stock run-up.

Amgen’s final offer hedges the big biotech’s risks and reflects the uncertainty that still exists around Kyprolis. Both companies declined to say if the deal was competitive. Mainstream media reports indicated there were multiple interested parties, but at the end of the day, the final purchase price suggests Amgen was the only serious contender.

“Kyprolis is at an early stage in its lifecycle, and that’s important to us as we feel that this is a point where we can still help maximize the full potential of the product by virtue of our experience in the global oncology market,” CEO Robert Bradway said.

While Amgen has a portfolio of supportive care products and considers itself an oncology player, it has had muted success developing drugs that treat tumors directly. Amgen does sell the EGFR inhibitor Vectibix (panitumumab) for colorectal cancer, but the drug has faced challenges given the competitive market and the fact that EGFR inhibitors are limited to certain patients (Also see "Amgen Further Narrows Patient Population For Its EGFR Inhibitor In Colon Cancer" - Pink Sheet, 17 Jun, 2013.). Amgen also markets Xgeva (denosumab) for the prevention of skeletal-related events in patients with bone metastases from solid tumors, but Xgeva strengthens bones. It doesn’t attack tumors.

The company has four novel oncology compounds expected to deliver registration-enabling data by 2016, Bradway said during a conference call Aug. 26 outlining the acquisition. Further, at the American Society of Clinical Oncology meeting in June, Amgen presented six different modalities for cancer within its pipeline and portfolio, including programs in the high-profile field of immunotherapy (Also see "Amgen Plays Diversity Card In Approach To Cancer; Immunotherapy Could Be Its Ace" - Pink Sheet, 17 Jun, 2013.).

The addition of Onyx will boost Amgen’s credibility in oncology. Onyx successfully has brought three cancer drugs to market in areas of high unmet medical need. Most recently, Onyx’s only solely owned marketed drug, Kyprolis, was approved in the U.S. under an accelerated review in July 2012 for patients with the bone marrow cancer who have failed at least two prior treatments, and has had a strong launch (Also see "How Kyprolis Overcame Serious Safety Fears To Reach Myeloma Market With Clean Label" - Pink Sheet, 30 Jul, 2012.). Kyprolis generated net sales of $125 million in the first six months of the year. It is expected to become a blockbuster eventually, with peak annual sales that could exceed $2 billion.

“Kyprolis is at an early stage in its life cycle, and that’s important to us as we feel that this is a point where we can still help maximize the full potential of the product by virtue of our experience in the global oncology market,” Bradway said during the call.

Onyx also developed and co-promotes kinase inhibitors Nexavar and Stivarga with Bayer in the U.S. and shares profits on Nexavar and royalties on sales of Stivarga outside the U.S. The agreement on Stivarga includes a change-of-control provision on the co-promote, Amgen management confirmed during the call, though the company said it plans to work with Bayer to reach a “constructive” arrangement.

Amgen will gain several pipeline assets as well, including oprozomib, an investigational oral proteasome inhibitor in Phase Ib/II trials for multiple myeloma. And the company is partnered with Pfizer Inc. on the oral small molecule cyclin-dependent kinase 4/6 inhibitor palbociclib, which is in Phase III development for advanced breast cancer. The drug showed promising progression-free survival results in Phase II testing. Onyx stands to receive an 8% royalty on sales of the product, which Wall Street expects could be a blockbuster. The company also has an immunoproteasome inhibitor ONX0914 in preclinical development.

Risks Ahead For Kyprolis

But most of Onyx’s future growth is tied to Kyprolis, and Kyprolis’ future growth prospects are tied to expansion in Europe and into the first-line treatment setting globally. Two Phase III trials, ASPIRE and FOCUS, are expected to read out in 2014. ASPIRE is the confirmatory trial Onyx needs to support FDA’s accelerated approval of Kyprolis, and FOCUS would serve as the basis for registration in Europe. Amgen said it remains committed to those trials.

Kyprolis Trials Amgen Needs To Deliver On

ASPIRE – Phase III study Kyprolis added to Celgene’s Revlimid (lenalidomide) and dexamethasone in patients with relapsed MM who have received one to three prior therapies. Confirmatory trial to support accelerated approval in the U.S.; interim analysis expected to read out in 2014.

FOCUS – Phase III study of Kyprolis versus best supportive care in patients with relapsed and refractory MM to support EU filing; data expected to read out in 2014.

ENDEAVOR – Trial comparing Kyprolis to Takeda’s Velcade (bortezomib) in patients with relapsed MM who have received one to three prior therapies.

CLARION – Study comparing Kyprolis to Velcade in patients with newly diagnosed MM.

During the negotiation process, news outlets leaked reports that the closing of the deal hinged on Amgen receiving additional data from the FOCUS trial. But when pressed by analysts during the conference call if Amgen did indeed receive any additional insights on FOCUS, Bradway declined to address the topic.

“I would simply reiterate that we had the opportunity to work closely with [CEO N. Anthony] Coles and his team, and through that process had the opportunity to gain insight into the molecule Kyprolis and its profile and again develop considerable confidence for the role that this medicine should be able to play in multiple myeloma in early and late stages of disease,” he responded.

One potential issue with Kyprolis, particularly in Europe, is reimbursement. Some industry observers wonder if Kyprolis will be able to command a premium price in that cost-constrained market, particularly if it is used in combination with other high-priced medicines. In the U.S., the drug launched with a wholesale acquisition cost of $1,658 per vial, or about $9,950 per month for a typical treatment, and it’s unclear even in the U.S. as treatment moves toward combinations, if payers may begin to push back (Also see "Multiple Myeloma Market Snapshot: New Combos Offer Greater Longevity, But Payers May Push Back" - Pink Sheet, 13 May, 2013.).

Takeda Pharmaceutical Co. Ltd.’s Velcade (bortezomib) will face patent expirations in 2017, which could further pose commercial challenges to high-priced brands. Oral proteasome inhibitors could be one avenue that could help market leaders maintain share of the market.

One still unclear aspect of the merger is how Onyx and its roughly 800 employees will be integrated into Amgen, a topic management declined to address. In an SEC filing Aug. 28, Onyx said employees would be notified if their positions would be retained or eliminated within 30 days after closing, but said details of the integration had not yet been finalized.

Investors and industry watchers will be particularly interested in where Onyx’s charismatic CEO Coles will land next. Coles took over as CEO in 2008 and was pivotal in transforming the biotech into a commercial company. He oversaw Onyx’s acquisition of Proteolix Inc. in 2009, from which it acquired Kyprolis, for $276 million upfront and $535 million in milestones (Also see "Onyx Sees Blockbuster In Oncology Drug Carflizomib, Buys Proteolix To Get It" - Pink Sheet, 12 Oct, 2009.).

For Onyx, the acquisition by Amgen will cap a 21-year history and clip short the company’s transformation into a potential large-cap player just as its story was getting particularly interesting to watch (Also see "Onyx’s Transformative Year: From Productive Partner To Big Cap Contender?" - In Vivo, 19 Mar, 2013.).