HZNP - Horizon Therapeutics: Attractive 7.16% Upside To Amgen Deal

2023-03-21 15:29:32 ET

Summary

• Horizon Therapeutics Public Limited Company is a $25 billion biotech that Amgen Inc. is acquiring.
• The FTC has issued a 2nd request.
• It doesn't seem likely this deal will ultimately get blocked.
• The spread is relatively wide, given I think the deal most likely closes before August.

Amgen Inc. ( AMGN ) is acquiring Horizon Therapeutics Public Limited Company ( HZNP ) at $116.50 per share. Amgen is a huge $100+ billion market cap biotech. Horizon's market cap is a chunky ~$25 billion, making this a large deal. There were several other bidders interested, including Johnson & Johnson ( JNJ ) and Sanofi ( SNY ). The initial bid actually came from Sanofi.

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.

The current share price leaves a 7.16% upside to the deal closing as planned.

As recently as early March, the company commented it was still confident in the timeline to close in H1 2023.

Arvind Sood

Yeah, no change in the timeline, Jay. We expect the deal to close within the first half of this year. There's been a fair amount of inquiry after we received a second request from the FTC. But I would just point out that we don't see any anti-competitive issues. And we are confident that the deal would close within the first half of this year.

At the Cowen healthcare conference, the company pointed out some analysts were already incorporating HZNP earnings into their targets:

It's important to note that our current publicly available consensus estimates are derived from a combination of estimates of Amgen as a standalone company, along with estimates from some analysts, who have already added Horizon into their estimates. So there's a little bit of a mixed bag there. As of today, this is true for both the first quarter and for the 2023 consensus.

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.

These comments are from after the 2nd request, and after starting the process of getting more permanent bond financing going.

We are already past the halfway point of March. If the deal closes at the end of H1 2023, this looks like a ~30+% annualized return. Admittedly, 2nd requests can take up to one year, but that seems unlikely. This is a big deal, but the anti-competitive concerns shouldn't be that complex. Even if it takes a year, that would indicate the closing end of January 24. The return wouldn't be good in terms of risk/reward relative to what you can get in 1-year treasuries, but it wouldn't be horrible.

I think it is quite unlikely the 2nd request isn't dealt with before August. The anti-competitive case seems quite weak to me. As I wrote in my prior article:

There isn't much overlap in portfolios. 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).

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.

If the deal closes near the end of July (provided it closes, which isn't a certainty of course) the annualized return is in the neighborhood of 20%. Consequently, given the current conditions, Horizon Therapeutics Public Limited Company seems like a very reasonable deal to buy into or add to. I suspect the spread has widened a bit due to increased volatility in equity and bond markets. In the short term, Amgen may struggle a bit more to get the bond financing done. On the other hand, yields have dropped fast, which may actually benefit the acquirer.

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