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TheStreet Open House

Amgen Regains Biotech Growth Cred With $10B Onyx Acquisition

Stocks in this article: AMGNONXXCELGGILD

THOUSAND OAKS, Calif. ( TheStreet) -- Investors appear to like Amgen's (AMGN) decision to buy Onyx Pharmaceuticals (ONXX) for $10 billion. Amgen shares are up 9% to $114.65 in early Monday trading.

If you go back to June 28, when news of Amgen's interest in acquiring Onyx was first broken reported, the stock is up 16%.

By acquiring Onyx, Amgen earns back much-needed biotech street cred, which has been lost in recent years. Instead of growing earnings modestly through financial hocus-pocus -- share buybacks and expense cutting -- the addition of Onyx's multiple myeloma drug Kyrpolis will pump up Amgen's revenue growth, which will, of course, translate into higher earnings.

Even with Onyx, Amgen may still not have the earnings growth of Gilead Sciences (GILD) or Celgene (CELG) over the next 4-5 years, but it's better than the status quo.

Amgen says the Onyx deal will be neutral to earnings in 2014 and accretive starting in 2015, although the company hasn't provided more detailed projections. Amgen does plan to continue increasing its shareholder dividend over time.

ISI Group analyst Mark Schoenebaum forecasts the addition of Onyx revenue, mainly from Kyprolis, will boost Amgen's earnings by 5 percent in 2015, 10 percent in 2016 and 15 percent in 2017.

The Onyx deal also diversifies Amgen's revenue stream. At present, Amgen generates a a majority of its $17 billion-plus in annual revenue from drugs like Aranesp and Neulasta which help cancer patients better tolerate their treatments. Once the Onyx deal closes, Amgen will add a blockbuster multiple myeloma drug to its portfolio, making the company more of a significant player in drugs that treat cancer, not just the side effects of the disease.

Amgen has nine experimental drugs in late-stage clinical studies, including four novel cancer drugs. If anything of these pipeline drugs are approved, it will only add to the company's long-term growth and make the Onyx deal look that much smarter.

Over the past year, Amgen's stock price has underperformed its large-cap biotech peers, but that could change if investors begin to recognize the company once again as a biotech growth story. AMGN Chart AMGN data by YCharts

Risks? Absolutely. Right now, Kyprolis is only approved in the U.S. for multiple myeloma patients no longer responding to any other treatments. Onyx is conducting four additional clinical trials of Kyprolis aimed at getting the drug approved in Europe and demonstrating benefit for earlier-stage multiple myeloma patients. Much of these new clinical data will begin to roll in during the first half of 2014.

Today's positive verdict on the Amgen-Onyx deal will sour if Kyproplis is unable to gain European approval or make inroads into the more commercially lucrative, early-stage multiple myeloma treatment markets.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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