OPNT - Horizon Therapeutics: Attractive 5.4% Upside To Amgen Offer

Summary

• Horizon Therapeutics Public Limited Company is a $25 billion biotech that's being acquired by Amgen Inc.
• The FTC has issued a 2nd request following a letter by Senator Elizabeth Warren.
• Warren raises a number of important issues but few that pertain specifically to this deal.
• Merger reviews are important, but it doesn't make a lot of sense to me to block this one.

Amgen Inc. ( AMGN ) is acquiring Horizon Therapeutics Public Limited Company ( HZNP ) at $116.50 per share. Amgen is a $125 billion market cap biotech, and Horizon's market cap stands at $25 billion, making this a large deal. There were several other bidders interested in the asset that have looked at it during the time the company was shopped, including Johnson & Johnson ( JNJ ) and Sanofi ( SNY ). The initial unsolicited proposal came from Sanofi. I think this merger may indirectly result from not really liking that proposition.

That's interesting because Horizon Therapeutics ended up selling itself at a fairly inopportune time if you look at the price level of the iShares Biotechnology ETF ( IBB ) and Horizon's share price development (roughly similar until the sale):

Shareholders have voted for the agreement. The acquirer obtained a bridge credit agreement, but the company has also started a process to issue a more permanent financing solution through the issuance of bonds.

With HZNP trading at $110.54, there is 5.4% upside to the closing price. If it breaks, the stock will likely fall to somewhere between $80-$100. That's a potential 27% loss. The deal is supposed to close somewhere in H1 2023. The 2nd request come at the end of January 2023. It followed a letter by Senator Warren to FTC head Lina Khan. The letter warned about big pharma deals in general but specifically zeroed in on this deal and the acquisition of Opiant Pharmaceuticals, Inc. ( OPNT ). I wrote about the Opiant deal as well, whose closing is imminent and includes an interesting CVR .

In my opinion, the Warren letter doesn't contain many solid arguments. Many of the issues addressed are perhaps a problem but they aren't great grounds to stop a merger. Here is an example paragraph:

Amgen’s $28.7 billion proposed acquisition of Horizon Therapeutics would be among the largest healthcare deals of recent years. This acquisition presents numerous antitrust and price gouging concerns. Both Amgen and Horizon have engaged in brazen price increases on drugs that face little or no competition, while Amgen has abused the patent process, creating patent thickets to “evergreen” their products, prevent generic competition, and maintain market dominance.27 Amgen’s most egregious price hikes have involved its most profitable drug, Enbrel. After acquiring Enbrel’s rights in 2002, Amgen has enacted 27 price hikes on the drug, raising its initial price of $996 per month in 2002 to $5,556 per month in 2020 – a 457% increase.

Maybe drug prices aren't fair (I don't know). Patent games and price hiking aren't cured by blocking mergers.

One paragraph makes the merging parties' case for them:

Amgen’s proposed acquisition of Horizon is especially alarming given Horizon’s ownership of a number of orphan drugs, which often garner high price tags due to the willingness of insurance companies to cover their costs. Horizon’s Raviciti, a treatment for urea cycle disorders, now costs nearly $700,000 annually, and has undergone a three-fold price increase since Horizon acquired the drug in 2015.37 Horizon’s Tepezza, the only FDA-approved medication to treat a rare thyroid eye disease

There isn't much overlap in portfolios at all. HZNP's big drugs are for Thyroid eye diseases and Krystexxa treats chronic gout. Amgen has a broad portfolio of cholesterol-lowering drugs, migraine drugs, dialysis drugs, and immunology drugs (specifically mentioned in the letter) among others.

I think this deal is mainly about the existing marketed products. If there are pipeline or smaller drugs with genuine anti-competitive concerns (maybe I'm missing something) about Amgen cornering the market (although this isn't mentioned in the Warren letter), these issues can often be resolved.

The 2nd request could add a little time to the likely closing time or it could add a lot of time. Generally, in big deals a 2nd request makes it take a lot longer for the deal to close. However, on the Amgen earnings call the CEO said:

Absolutely. We still see the Horizon transaction closing in the first half of 2023.

This comment is from after the 2nd request, and so is the move to start the bond financing.

There are a number of reasons why I think this is a reasonable merger to get involved in. First, of all, Horizon Therapeutics Public Limited Company looks to have been acquired at an opportune time during a biotech swoon. It is a good sign that Amgen has moved ahead with the process of turning the bridge financing into bond financing . The upside is over 5% while the deal is still likely to close in H1 2023. We are already at the end of February. If it closes at the end of H1 2023 this looks like a ~15+% annualized return.

I think it can take longer, but it could also all get resolved quite quickly. Especially as the anti-competitive case seems quite weak to me. Horizon Therapeutics Public Limited Company seems like a very reasonable deal to add to my portfolio given the current conditions.

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