Amgen-Onyx Merger Deal

Amgen-Onyx Merger DealThe Purchase Deal ConditionsRepresentation and warranties (R&W)- These are fundamentally the underlying matters or facts as they are being presented in terms of the agreement. An important characteristic of any agreement is the building of R&W by the parties to each other. The sellers R&W comprise the larger part of the agreement. R&W serve three main purposes. They are informative- The sellers R&W, and they carve outs to the R&W by way of a disclosure schedule coupled with the buyers due diligence, enable the buyer to learn as much as possible about the sellers business prior to signing the definitive acquisition agreement. They are protective-The representations made and warranties given by the seller provide a mechanism for the buyer to walk away from, or possibly to renegotiate the terms of, the acquisition, if the buyer discovers facts that are contrary to the R&W between the signing and the closing of the transaction or even afterwards. They are supportive. The sellers R&W provide the framework for the sellers indemnification obligations to the buyer after the closing.The R&W will survive the termination of the agreement. Therefore, the acquirer would be entitled to claim indemnification on the basis of misrepresentation post closing. The law does not impose any limitation from seeking indemnification if the claim is raised within the prescribed period from the time the cause of action arose. However, the parties may contractually agree to limit the benefit of the representation on the insistence of the sellerTermination Deal Conditions Cont.Covenants- They can classified into negative and affirmative covenants. Negative covenants protects the buyer as the seller is restricted from taking any actions prior to the closing that changes the business the buyer wishes to buy, restrict the seller from taking certain actions prior to the closing without the buyers prior consent.

Affirmative CovenantsNegative CovenantsAffirmative covenants obligate the seller or the buyer to take certain actions prior to the closingNot entering into transactions or incurring liabilities outside the ordinary course of business or in excess of certain amountsObtaining the necessary approvals from the board and the shareholders;

Not mending or terminating material contractsObtaining the necessary third party consents; and

Not making capital expenditures beyond those budgeted, disclosedObtaining the necessary statutory approvalsNot transferring assets other than those contracted for and disclosed, etcAllowing the buyer full/restricted access to the sellers books and recordsNot doing anything that would make the sellers representations and warranties untrueC

Covenants may also include an undertaking that the sellers will not allow a change in the board of directors until closing of the transaction, unless relating to the appointment of directors nominated by the buyer.Deal Conditions Cont.Condition Precedent- Its an essential component of an agreement from the buyers perspective in so far as it protects the interests of the buyer by putting certain conditions on the seller. Conditions precedent varies from transaction to transaction depending on the facts and circumstances of each case. The most essential condition precedent would be providing clear and marketable title to the assets/shares of the target company. Foreign investment approval- This is a determining factor in structuring any transaction under the countrys regulatory regime.Regulatory approvals- Obtaining approval of Competition OfficeCorporate authorizationNo Objection CertificatesDue Diligence ResultsTermination- If there will be a period of time between signing of the acquisition agreement and closing, the parties will need to agree on certain rights pursuant to which a party may terminate the acquisition agreement prior to closing. Parties generally include the following termination rights in merger & acquisition agreement-Mutual AgreementBreach of R&W or failure to perform a covenantDue to legal Impediment Miscellaneous provisions-Indemnification- The parties generally indemnify each other for all losses, claims, damages, costs and expenses incurred as a result of acts or misrepresentation or any breach, inaccuracy or incompleteness of any condition set forth in the agreement or any other related documents. Deal Conditions Cont.Termination of the agreement and/or completion of the acquisition, the indemnification provisions survive and continue to protect the parties for any wrongs that may have been committed prior to the closing or termination. Dispute Resolution -The common approach adopted in devising a dispute resolution system is to agree on a neutral location for conducting arbitration to quell any inhibitions of parties of obtaining home advantage. The substantive law of the contract is predominantly law of land and occasionally that of New York. Working of these provision- Acquisition agreements provide that, as a condition to closing, the representations and warranties of the parties must be true and correct at the closing, and that the pre-closing covenants have been performed or fulfilled prior to the closing. This may be confirmed by each party delivering a written certificate to that effect to the other party. They work in a collaborative way by providing guidelines to the parties and imposing restriction and defining the acquisitions conditions through a formal campaigning.

II. Condition favouring Buyer and SellerThe acquisition agreement contains conditions to each partys obligation to close the transaction. If any one of the conditions is not satisfied as of the contemplated closing date the party for whom the condition is included in the acquisition agreement may decline to proceed with the transaction (without incurring liability to the other party).There is an obvious tension between the interest of the buyer and the interest of the seller in the negotiating the closing conditions. The buyers primary interest is to preserving the benefit of its bargain. It does not want to be required to close a transaction if, For example, there has been a material adverse change in the target business between signing and closing. In contrast, the primary interest is in limiting the buyers ability to refuse to close a transaction once it is signed an announced. The target concerned that it will be viewed as damaged goods if the buyer walks away from signed transaction.

Buyers favourable conditionsSellers favourable conditionsMaterial adverse change in the business, capitalisation, assets, liability etc.Performance of covenants-All of the covenants and obligation that the acquired corporation are required to comply with or to perform at or prior to the closing shall have been complied with and performed in all material respects.

Accuracy of representation- The buyers version of this condition tests the accuracy of the representation at two points in time- As the signing of the agreement- the when made standard As of the closing- the bring down standardThe buyer will desire to retain the when made and bring down standard because it encourages care in the preparation of the sellers disclosure schedule.Consents- All consents indentified in part 6.3 of the disclosure schedule shall have been obtained and shall be in full force and effect.Matters covered by operative Indemnification provision-Breach of representation and warranties will brought down to closing.Specific matters discovered during the buyers due diligence investigation of the target will also include breach.No Material Adverse Effect- Between the date of this agreement and closing there shall not been any MAC on the business, result of operations or financial condition of the acquired corporation.

II. Conditions cont.Buyers conditionsSellers ConditionsLiability cap- Different liability cap might apply to different types of liabilities (e.g. one cap might apply to all representation except for intellectual property, capitalisation and deal- related representation which have higher cap )

Shareholder approval- The principal terms of the merger and the others matters referred to in section 5.2 shall have been duly approved by the affirmative vote of the shareholders of the company in accordance with applicable legal requirements and the companys incorporation documents.

Effect of tax benefits/costs- Damages should not give specific effect to tax benefits and tax costs because buyer has already agreed to substantial limitations on its indemnification rightsNo restraints- Any order or injunction preventing the consummation of the merger shall have been issued by any court of the competent court and remain in effect, and there shall not be nay legal requirement enacted to the merger that makes consumption of merger illegal.Exclusivity- the right of each party hereto assert indemnification claims and receive indemnification payment shall be the sole and exclusive right and remedy of exercisable by such party with respect to any breach by the other party hereto of any representation or warranty.

Indemnification by seller- As per section 11 seller indemnify purchaser against any damages that he occurs during one year period commencing on the closing date as direct result of any breach.

Waiver of consequential damages- Absent fraud or willful misconduct, no person shall be entitled to recover consequential or punitive damages with respect to any breach of any representation or warrant under this agreementDeductible amount- Only cumulative amount of damage of the warranties incurred direct result of breach otherwise not required to make any indemnification payment.

III. Strategic analysis of the deal Diversification- This deal provide diversification to Amgen access to a rapidly expanding cancer-drug market with a new product that offers surerevenue.Strategic view-Onyx was single product company which got approval from U.S.FDA for a rare blood cancer drug and estimated $3 billion revenue by 2021.Competitive Advantage over others to Amgen- It take a decade to develop a new drug and millions of dollars to develop new medicine. Thus by this deal Amgen got approved medicine which has expected to provide 250% growth by 2019 to them.Amgen filled the hole in the oncology market by acquiring Onyx. Amgen record in track and quality and reliability will bring more reliability to the Onyx portfolio.Quick wins following post merger integration- After the merger of the companies the Amgen prices rises at 10%.Long term strategic and operational improvements see Added growth and capital will help Amgen to provide more dividendsIV. Valuation of the DealThe price that is ultimately paid is a function of the value of the asset and the strategic intent of the buyers and sellers, said Andrew Hindman, a former Onyx executive and the chief executive of Tobira Therapeutics. As long as there is a firm basis for paying a premium, then valuations can go wherever they're deemed to go. At present we value the Onyx at $7.8 billion which seem very reasonable as the Amgen plays the bet without knowing the drug trial test result of the Onyx medicine. Onyx does not holds the global rights to Kyprolis . The orphan drug has exclusivity in the US until July of 2019 and Onyx holds patents extending till 2025 only which is very short period to recover huge growth.Amgen has also to deal with copycat drugs from which provide the drugs at cheap prices and alsos have to maintain the price of their drug.

V. Market responseAmgen look pretty well after the it barrelled up almost 10% that could reignite the company's growth.

V. Market response cont. Short tern growth- it is predicted that Amgen will be profit more from the short term growth around 250% in the coming 5 years and there will be steady growth around 5-6%

Appendix 1.cYears Ending December 31Actual |------------------------------------------------------------------------------------------ Forecast ----------------------------------------------------------------------------------------|20132014201520162017201820192020202120222023Total revenue$362 $471 $659 $988 $1,581 $5,534 $11,069 $21,030 $37,854 $56,781 $73,816 Cost of Goods Sold257101655111210379568738Gross profit3604666529781,5655,47910,95820,82037,47556,21373,078Selling, general and administrative expenses70941321983161,1072,2144,2067,57111,35614,763Earnings before interest, taxes, depr. & amort. (EBITDA)2903725207801,2494,3728,74416,61429,90444,85758,315Depreciation and amortization264766994745,5344,4276,3097,5715,6787,382Earnings before Interest and taxes (EBIT)264325454681775-1,1624,31710,30522,33339,17950,933Available tax-loss carryforwards000000-1,1620000Net taxable earnings26432545468177503,15510,30522,33339,17950,933Federal and State Income Taxes10613018227331001,2624,1228,93315,67220,373Net Operating Profit After-Tax (NOPAT)158195272409465-1,1623,0556,18313,40023,50830,560Add back depreciation and amortization264766994745,5344,4276,3097,5715,6787,382Subtract Capital Expenditures-10-12-13-15-17-20-23-27-31-35-40Subtract New Net Working Capital21345695277332498841946852Free Cash Flow$95 $251 $359 $549 $1,017 $4,629 $7,791 $12,964 $21,782 $30,097 $38,753 Terminal value, 2011$2,71,271 Present Value of Free Cash Flows @ 20%232836552092934065686545,616Total Present Value of Company Operations$7,888 Appendix 2Forecasting Variables:2013201420152016201720182019202020212022Revenue growth factor30%40%50%60%250%100%90%80%50%30%Expected gross profit margin99%99%99%99%99%99%99%99%99%99%S, G, & A expense % of revenue20%20%20%20%20%20%20%20%20%20%Depr. & Amort. % of revenue10%10%10%30%100%40%30%20%10%10%Capital expenditure growth factor15%15%15%15%15%15%15%15%15%15%Net working capital to sales ratio19%18%17%16%7%6%5%5%5%5%Income tax rate40%40%Assumed long-term sustainable growth rate5%per year after 20115%Discount rate20%20%2013201420152016201720182019202020212022Valuation Model Outputs:Gross profit margin99%99%99%99%99%99%99%99%99%99%Net operating profit margin41%41%41%29%-21%28%29%35%41%41%Free cash flow ($ mil)$250.9 $359.0 $548.5 ######$4,628.9 $7,790.5 ########$21,781.6 $30,096.9 $38,753.0 Terminal value ($ mil)$2,71,271.0 PV of Company Operations ($ mil)$7,888.0