Amgen Bets on Enbrel's Growth in Buying Immunex

Updated from 9:33 a.m. EST

Amgen (AMGN) used a marathon two-hour conference call Monday morning, loaded with detailed projections and explanations, to explain its $16 billion purchase of Immunex (IMNX) to a skeptical crowd of Wall Street analysts and investors.

The strategy seems to be working, at least for now. Shares of Amgen fell at the opening bell Monday but then reversed course, moving up $2.87, or 3.8%, to $58.17 a share in recent trading. Share of Immunex were up $2.67, or 11%, to $28.49 a share.

Amgen said it would pay about $30 a share for Immunex, a 17% premium over Immunex's Friday closing price of $25.62 a share. Under terms of the agreement, each share of Immunex common stock will be exchanged for 0.44 shares of Amgen common stock plus $4.50 in cash, or about 85% in stock and 15% in cash.

Amgen expects the deal to close in the middle of 2002.

The $16 billion deal comes in at a $2 billion discount from the price reportedly put on the table Thursday, when talk of the deal leaked out. Concerns about the deal's large price tag and its negative impact on Amgen's near-term earnings forced Amgen shares down 13% over the preceding two trading sessions. Amgen shares closed Friday at $56.03 a share.

But the advance criticism of the deal seemed to play into Amgen's hands. CEO Kevin Sharer and his team were well-prepared and wasted no time on their conference call doling out facts and figures aimed at extolling the deal's virtues.

Amgen said the acquisition would dilute 2003 earnings by less than 5% and would add to earnings in 2004. But the company stepped back from making any real prediction for 2002, with the unspoken assumption being that there would be significant earnings dilution.

In its press releasing announcing the Immunex purchase, Amgen said it expects to generate $5.5 billion in revenue next year, earning $1.5 billion. But given the closing of the acquisition in the middle of the year and the greatly increased share count, that will mean earnings per share will fall well below current, predeal Wall Street estimates of $1.42 a share, according to Thomson Financial/First Call.

The companies said they expect to wring out more than $200 million in merger-related cost savings in 2003 and more than $250 million in 2004, representing about 5% of the combined companies' operating expenses.

Amgen is expected to grow earnings 12% this year to $1.19 a share. Before buying Immunex, Amgen had forecast low-20% earnings growth starting in 2002 and extending through 2005. Now, Amgen says product sales will grow in the low-30% range over the next five years, with earnings per share growth reaching the mid-20% range.

Saved by the Enbrel?

Monday's deal brings together two biotech firms that have risen to the top of the sector on the backs of some very successful drugs. Amgen sales now top $4 billion annually thanks to the anemia-fighter Epogen and the anti-infection agent Neupogen. Immunex's top draw is Enbrel, used to treat rheumatoid arthritis. Enbrel sales are expected to reach $750 million this year and close to $1 billion in 2002.

This is the largest-ever merger between two biotech firms, dwarfing the $2 billion deal announced earlier this month between Millennium Pharmaceuticals (MLNM) and COR Therapeutics (CORR).

Amgen gets to its new, improved sales and earnings numbers by assuming that Enbrel sales reach $3 billion by 2005, a figure Sharer calls "conservative." Digging deeper into the numbers, Sharer believes Enbrel sales will reach $1.6 billion in 2003 and $2.4 billion in 2004. This assumes that Amgen's expertise in sales and marketing helps Enbrel grab additional market share in rheumatoid arthritis.

It also assumes that dermatologists start prescribing Enbrel to a significant number of psoriasis patients in 2003, even though the drug won't be approved for the disease until 2004. Amgen believes midstage testing data to be unveiled early next year will provide the impetus for this off-label use of the drug. TheStreet.com examined this part of the deal in depth Friday.

Skeptical biotech observers believe Enbrel sales will slow as competition from other drugs erodes Enbrel's market share. Seeking to counter this argument, Amgen executives Monday insisted that all their financial models take competition into account.

"We are not assuming overwhelming market share for Enbrel," says Amgen's Sharer. "We are leaving plenty of room for other [competitive] products to be modeled in."

Even if Enbrel wasn't to reach the $3 billion sales goal by 2005 -- racking up just $2 billion in sales instead -- Sharer says Amgen would still be able to generate earnings growth in the low-20% range.

Of course, what he doesn't say is that Amgen is supposed to grow earnings in the low-20% range through 2005 without Immunex, so this would essentially mean that the company paid $16 billion for nothing.

American Home Products (AHP), which owns 41% of Immunex, is supporting the deal. The drug giant will receive the same deal as other Immunex shareholders and will own 8% of the combined companies when the transaction is completed. Amgen said it would continue to share U.S. and worldwide rights to Enbrel sales with AHP, which will also continue to help market the drug. But AHP has given up rights to future Immunex drugs in exchange for an undisclosed sum.

Amgen executives also said Monday that acquiring Immunex not only puts another blockbuster drug on its roster, but will also help boost sales of its own rheumatoid arthritis drug, Kineret, which was approved by the Food and Drug Administration in November. Kineret was approved for patients who failed other treatments, including Enbrel. Amgen is already conducting tests to determine whether a combination of the two drugs proves beneficial to patients.

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