Yes, Amgen overpaid for Otezla—but that doesn't make it a mistake: analysts

Wall Street analysts took a couple of days to crunch the numbers on Amgen’s planned $13.4 billion purchase of Celgene’s psoriasis blockbuster Otezla, and now they’ve reached a consensus: The biotech giant overpaid for the drug. Then again, if anyone can make the purchase pay off for investors, it would be Amgen.

Analysts on average expect Otezla to be bringing in nearly $3 billion in annual sales by 2024, according to data collected by EvaluatePharma. Factor in a typical 6.5% discount rate and margins, plus the $2.2 billion in tax breaks Amgen promises it will generate, and the product has a net present value of $11.8 billion, meaning the company overpaid by nearly $2 billion.

But Amgen brings something to the table that most big biopharma players don’t, which is a sales force that made the anti-inflammatory Enbrel a $5 billion-a-year powerhouse. That sales force “should now go into overdrive to wring maximum sales out of Otezla, a novel oral psoriasis therapy,” EvaluatePharma said. “Thus perhaps current sellside forecasts do not reflect the bull case.”

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Analysts at SVB Leerink are decidedly bullish on the Otezla deal. They sent a note to investors Tuesday predicting Otezla sales could be as much as 50% higher than consensus estimates. SVB Leerink predicts the product’s sales will come in at $2.5 billion next year and expand to $3.6 billion in 2023. The firm is on board with Amgen’s prediction that the product will achieve low-double-digit sales growth until it loses its U.S. patent protection in 2028.

If Amgen can pull that off, Otezla’s net present value would be $9.1 billion, and no one will accuse the company of having overpaid, SVB Leerink points out—but it is a big “if.” Amgen said it would break even on the deal on a cash basis around 2024, citing opportunities to expand Otezla’s label to include scalp psoriasis, juvenile idiopathic psoriasis and other indications. None of that is guaranteed, however, and even with SVB Leerink’s optimistic sales numbers, Amgen wouldn’t break even until 2025 at the earliest, the firm said.

There are other risks Amgen will have to contend with, not the least of which is the Federal Trade Commission’s assessment of the Otezla purchase. Bristol-Myers Squibb was forced to sell Otezla in order to consummate its $74 billion purchase of Celgene, due to concerns it would compete with BMS’ investigational TYK-2 inhibitor, BMS-986165. But Amgen not only has Enbrel, it also markets a biosimilar version of AbbVie’s anti-inflammatory Humira, leading some to wonder whether the Federal Trade Commission (FTC) might also have a problem with this deal.

Or as SVB Leerink put it, “we still don’t understand why having Otezla in the same portfolio as a TYK2 in phase III is not OK, but having it in the same portfolio as Enbrel and a biosimilar Humira both for the same indication is OK.”

Amgen CEO Robert Bradway addressed those concerns in a conference call with analysts Monday, though he stopped short of guaranteeing the deal will pass muster with regulators. “We have a high degree of confidence, but we want to respect the FTC’s process, and they’ll review it on the merits,” he said.

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There’s no doubt that Amgen needed to do something big to prop up its top line. Its revenues fell 3% to $5.9 billion in the second quarter, dragged down by competition to old hit drugs Sensipar and Neulasta. The competition was so steep, in fact, it overwhelmed double-digit prescription growth from newer products like migraine treatment Aimovig and cholesterol reducer Repatha.

The company is counting on further growth from new launches like Aimovig, as well as a boost from its oncology portfolio. AMG510, a KRAS inhibitor the company is testing in several cancer types, is already generating excitement on the Street. At the American Society of Clinical Oncology annual meeting in June, the company said that in a small phase 1 study AMG510 halted tumor growth in non-small cell lung cancer (NSCLC) and colorectal cancer. The company is expected to release extended results in NSCLC in early September.

In fact, analysts at RBC Capital Markets believe the combination of Otezla, AMG510 and a recent patent win around Enbrel could provide a major revenue boost over the next three years, they said in a note to investors on Monday.

“Despite initial ‘sticker-shock,’” RBC said, Amgen’s purchase of Otezla is a “a well-suited add” to its existing immunology and inflammation portfolio. “We note this is a dramatic shift in top-line growth prospects,” RBC added, making it possible for Amgen to achieve a three-year 6% compound annual growth rate—far outpacing the 1% growth rate it would likely have seen without Otezla.