Amgen to Acquire Tularik

Updated from 10:18 a.m. EST

Less than one week after its chairman said his company wasn't looking to make a big acquisition just to boost its stock, Amgen ( AMGN) said Monday it would spend $1.3 billion to purchase all of the shares it doesn't own in Tularik ( TLRK).

In late afternoon trading, Amgen's stock gained $1.73, or 3%, to $59.82, an encouraging sign because acquirers' shares often drop in reaction to their takeover bids.

Amgen, of Thousand Oaks, Calif., now owns 21% of the shares in Tularik, a South San Francisco-based biotech company. The deal places a value of $25 a share on Tularik's stock, which closed at $17 on Friday. In Monday trading, Tularik's shares jumped $7.56 to $24.56, reflecting the offer price's rich premium.

Amgen said the transaction won't affect its 2004 financial guidance for what it calls adjusted earnings per share of $2.30 to $2.40, which was announced in late December. The guidance for earnings based on generally accepted accounting principles (GAAP) is $2.13 to $2.23; but Amgen added that it has yet to calculate the one-time expense associated with writing off certain research and development activities associated with the Tularik acquisition.

The companies said the deal is expected to close during the second half of 2004. The transaction, approved by the boards of both companies, must be approved by Tularik's shareholders as well as by regulators.

Tularik is a company with no products and a tiny amount of revenue from licensing and research agreements, but Amgen is betting that it has a lot of promise. Tularik has five products in various stages of clinical testing, the most advanced being a liver cancer drug called T67 that is in Phase 3 testing, the last stage prior to a company seeking approval for a drug from the Food and Drug Administration.

Other experimental Tularik drugs focus on cancer of the esophagus and stomach; rheumatoid arthritis and psoriasis; diabetes; and obesity. Amgen and Tularik have been collaborating on cancer drug research.

David V. Goeddel, Tularik's chief executive, will remain with Amgen, overseeing research projects from his South San Francisco office. Approximately 300 of Tularik's research scientists will join Amgen.

For an $8.4 billion company like Amgen, or any other company seeking a strategic acquisition, the decision to purchase Tularik represents a calculated bet on the prospects of experimental products that may be two to four (or more) years away from commercialization. It also represents a poker player's reverence for timing; you will pay less money for a company whose products are in the early stages of clinical testing, but you face more risk of the products failing in the later stages. By contrast, you can reduce your risk by purchasing a company whose products look good in late-stage testing, but you don't eliminate all the risk and you certainly must pay a premium. Amgen got an early look at Tularik's cards by purchasing 21% of its stock.

"Amgen is excited about combining with Tularik, a high-science company that is focused on grievous illnesses and that shares our culture," said Kevin Sharer, Amgen's chairman and chief executive.

"Grievous illnesses" is the Amgen mantra, a term the company uses often in financial presentations to try to distinguish its research efforts from those of other companies. This approach, in effect, also alerts investors that discovering ways to defeat difficult and debilitating diseases takes more time and money -- and investor patience -- than the search for incremental improvements to existing drugs for less serious ailments.

Amgen's major products include Enbrel for rheumatoid arthritis; Epogen for kidney disease patients suffering from anemia; Aranesp for treating anemia among patients with kidney disease or receiving chemotherapy; Neupogen for fighting the infections caused by certain anti-cancer drugs and chemotherapy; and Neulasta for combating a chemotherapy-induced blood disorder that weakens the body's ability to fight infections.

But some analysts have complained that there is a gap between what Amgen sells today and what it might introduce in a few years. Last Tuesday, after Amgen conducted a session for analysts and investors in New York focusing on its research, some analysts still displayed a what-have-you-done-for-me-lately tone.

When asked last Tuesday if Amgen might buy a company with products in late-stage clinical testing or buy these products themselves, Sharer snapped that he was not trying "for a quick fix" or "to pull a rabbit out of a hat" just to advance the stock.

"We try to under-promise and over-deliver," he added. "We're in this game for the long haul. We didn't hold this meeting to get a quick pop in the stock."

Monday's acquisition announcement didn't change any equity ratings on Wall Street where, despite some analysts' barking about near-term prospects, the buy ratings outnumber the hold ratings by 25 to 5, according to Thomson One Analytics. (There's one sell rating.)

The deal "makes strategic sense as it significantly boosts Amgen's late-stage oncology pipeline," said William Tanner, of Boston-based Leerink Swann & Co., in a Monday research report.

Tanner said Amgen's discussion last week of its R&D efforts "left us with the impression that the majority of its projects are not sufficiently advanced to shed light on the source of near- to intermediate-term revenue and earnings growth" aside from the company's franchise products.

The Tularik liver cancer drug "has the potential to yield modest revenues but at least position Amgen as a more meaningful player in the cancer drug market," said Tanner, who rates the stock as outperform. (He doesn't own shares, but his firm is a market maker in Amgen's stock and intends to seek investment banking compensation from Amgen in the next three months.)

The Tularik acquisition diversifies Amgen's research and development and strengthens its drug prospects, said Ian Somaiya, of Thomas Weisel Partners, in a Monday research note, maintaining a peer perform rating on the stock. "When and whether the deal will bear fruits remains to be seen," said Somaiya. (He doesn't own shares but his firm is a market maker in Amgen's stock and expects to seek or receive investment banking fees in the next three months.)

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