Publications
Partners
Amgen is an independent US multinational biotechnology firm that was founded in 1980. With a market capitalisation of $117bn, it is the world’s largest biotechnology company, edging out Gilead Sciences (as at 27 May 2016).
Amgen is focused on discovering, developing and manufacturing medicines that treat serious illnesses within the following focus areas: oncology, inflammation, cardiovascular disease, neuroscience, bone health and nephrology.
The group employs nearly 20 000 people worldwide and generated sales of $22bn and profit after tax of $7bn in 2015, with approximately 75% of sales from the US.
Amgen’s first-quarter results saw year-on-year revenue growth of 10% and adjusted earnings per share growth of 17%, with management lifting full-year estimates for 2016.
Revenue growth was largely driven by price increases from its blockbuster Enbrel product, with adjusted earnings per share growth driven by cost-cutting initiatives and an ongoing share buy-back programme.
Key products by focus area and revenue include:
- Neulasta/Neupogen (infection prevention for patients undergoing chemotherapy) (27%);
- Enbrel (autoimmune disease, i.e. rheumatoid arthritis (25%);
- Aranesp and Epogen (anaemia treatments commonly associated with renal failure and chemotherapy (17%); and
- Sensipar (late-stage renal disease) (7%).
Amgen represents a good opportunity brought about largely by external factors. Recent political rhetoric around price gouging and the spectacular collapse of Valeant has caused unease among investors, with the Nasdaq Biotechnology Index’s 1-year return of -24% versus S&P 500’s 1.2% bearing testament to this.
Add to this ongoing concern with regards to “patent cliffs” (patented drugs reaching expiry), and it is easy to understand the general nervousness.
We remain positive on Amgen’s longer-term potential, however, given a number of drugs introduced over the past few years and an attractive biosimilar pipeline.
We believe this will alleviate pressure from competition, which is affecting a number of Amgen’s legacy drugs at or near expiry – such as Neulasta (2015), Epogen (2015) and Sensipar (2016).
Prolia and Xgeva, which treat osteoporosis and fracture prevention in cancer patients, was approved during the fourth quarter of 2010 and could each generate peak annual revenue in excess of $2bn.
Kyprolis, used to treat multiple myeloma, acquired through the Onyx deal in 2013 will be a significant driver of growth with forecast peak sales in excess of $2bn in what is a fast-growing sector.
Lastly, the cholesterol-lowering drug Reopatha, launched in 2015, could potentially result in peak revenue of $4bn to $5bn per annum.
Continued significant reinvestment in the form of research and development (19% of revenue), capital expenditure to improve efficiency and production techniques, and selective acquisitions bode well for shareholders in our view.
The group is ungeared on a net debt basis, generates significant free cash flow (40% of revenue) and high returns on invested capital, which positions it well to expand its portfolio of drugs through internal development and acquisition.
Importantly the valuation looks attractive when viewed against the biotechnology index, broader market and dividend growth companies.
We derive a conservative fair value of $180 per share (about 15% upside) making Amgen an attractive investment in the current market for such a high-quality business.
In the longer term, we remain positive on the sector and believe medical breakthroughs will enable biotechnology companies to serve an aging population with higher concomitant disease burden.
Victor von Reiche is an equity analyst at Citadel.
This article originally appeared in the 9 June 2016 edition of finweek. Buy and download the magazine here.
