Amgen (AMGN) has been a popular target for activist investors, who would like to see the biotech giant split itself in two. In a note published yesterday, RBC Capital Markets’ Michael Yee and team explain why that he doesn’t think that’s likely to happen:
Reuters This is because based on long conversations with Amgen, 1) unlike pharma, Amgen’s commercial portfolio is quite concentrated (basically EPO, G-CSF, Enbrel), 2) commercial infrastructure can’t be split and is needed to launch new products (PCSK9, migraine, osteoporosis, etc) so how can you split up
infrastructure with new drugs that need to be sold in next 1-3 years?, 3) Amgen finance/tax advisors suggest legacy business if split off could see a higher estimated 30-35% tax rate than the current corporate reported rate of 15-18%, thus actually resulting in possible dilution that would have to be offset by significant P/E expansion 20-30% higher which is unlikely, 4) Amgen’s legacy business is basically flat to declining and consensus has it down 5% annually which doesn’t make it that attractive as a stand-alone and the significant cash flows are paying for the pipeline.
In other words, Amgen’s two units are too dependent on each other for a break-up to work right now, in our view. A business with steadily declining revenues or a business with an extensive lineup of costly development drugs with no clear superstar are tough investments under various playbooks. Our conversations with large shareholders support a similar view.
That doesn’t mean Yee thinks investors should bail on Amgen, though he does think that an increase in share price will have to come from its pipeline and investors willing to pay more for its shares.
Shares of Amgen have dropped 1.1% to $142.55 at 11:57 a.m. today.
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