Breakingviews: Amgen pops $2.7 bln dose of risky Chinese medicine

Amgen’s Chinese deal could be good medicine. The pharma giant is paying around $2.7 billion for a 20.5% stake in biotech group BeiGene. Splurging on a minority stake in a pre-profit outfit that just fought off a short-seller is hard to stomach. But a partnership promises quick access to China’s cancer-drug market at a critical time.

The cash offer of $174.85 per BeiGene ADS represented a 36% premium to the 30-day volume-weighted share price. Investors have reason to question the hefty markup. The Chinese company’s net loss widened to almost $700 million in 2018, compared with around $100 million a year earlier. While that’s hardly unusual for a new technology, it’s not the only concern. In September, short-seller J Capital suggested that it was inflating sales figures. Management issued a convincing rebuttal, but the allegations are disconcerting in an industry that has fallen prey to fraudsters in the past.

Even so a deal could stack up. Minority stakes are not unusual in strategic pharma tie-ups. For example, U.S.-listed Celgene also bought a stake in BeiGene in 2017 when they agreed to work together. This relationship has a clear rationale too. BeiGene will commercialise three Amgen cancer drugs in China, and the two companies will also collaborate on development of Amgen’s oncology pipeline. Analysts at Jefferies reckon their medicine could reach some $1 billion in cumulative sales over five years as demand grows. Cancer cases are rising at a rate of almost 4% a year in the country, according to the Chinese Journal of Oncology.

The timing is important as well. International rivals are already muscling into the market, and the likes of AstraZeneca are gaining ground. Meanwhile, homegrown biotech benefits from supportive government policies. Factor in execution – these deals can take as long as a year to close – and Amgen has little time to lose.

This buyer can ultimately afford the risk for such returns: its free cash flow rose to more than $10 billion last year. BeiGene shares are just below where they were when the short-sellers attacked; that may have helped Amgen negotiate a better price. Even if the risk leaves some investors a little queasy, the deal holds hope for healthy return.

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