Saturday, April 21, 2007

Amgen's financial engineering backfires

Pharmalyst read an interesting article in yesterday's WSJ (subscription) regarding some savvy financial engineering that Amgen undertook last year. Unfortunately it looks like Amgen's Corporate Finance department was not talking to the crew that was undertaking additional clinical trials featuring Aranesp. The Aranesp-driven decline in Amgen's share price caused additional heartburn as these financial maneuvers backfired.

As most readers of pharma blogs know, results from these trials have cast a cloud over the entire Aranesp family of products which according to the WSJ article represents about half of Amgen's sales. What readers may not know is that in Feb 2006 Amgen issued about $5 billion of convertible bonds. From Amgen's press release on this topic, they used some of the proceeds for

"entering into separate warrant transactions with one or more of the initial purchasers and/or their affiliates. These transactions will generally have the effect of increasing the conversion price of the notes to $107.90 per share, representing a 50 percent premium based on the last reported bid price of $71.93 per share on Feb. 14, 2006."

Basically looks like they used the part of the money ($750m per WSJ) to buy the warrant call options associated with the convertible bond issue to drive up their price (and therefore the conversion price at which the bonds could be converted to stock). The net result according to WSJ was that their cost of borrowing this kind of money was only around 3%.

Amgen used about $3 billion from the bond issue to buy back Amgen stock in the $70 price range. Given that the stock has fallen about 12% thanks to the Aranesp trials, looks like their financial engineering moves cost them dearly!

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