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Amgen Inc. (AMGN) Value Idea

December 14, 2011 | About:
Mara Kohn

Mara Kohn

4 followers
Amgen Inc. (AMGN) is a leader in biotechnology-based human therapeutics, with historical expertise in renal disease and cancer supportive care products.

Some of the flagship drugs include red blood cell boosters Epogen and Aranesp, immune system boosters Neupogen and Neulasta, and Enbrel for inflammatory diseases.

Amgen introduced its first cancer therapeutic, Vectibix, in 2006 and received approval for bone-strengthening drug Prolia/Xgeva in 2010.

Amgen's global sales amounted to $15.1 billion in 2010 thanks to the large-stage drugs.

Sensipar, a treatment for renal disease patients, is rapidly approaching blockbuster status, and cancer treatment Vectibix is seeing earlier-stage use among patients with certain genetic profiles.

Amgen launched platelet booster Nplate in 2008 to compete with GlaxoSmithKline's Promacta. Most importantly, Amgen also received FDA approval for denosumab in 2010. In cancer patients, data so far indicates superiority to Novartis' blockbuster Zometa, and the drug recently showed the ability to delay the development of bone metastases in a key clinical trial.

Positives and Risks

Amgen has a strong cost-control ability. The company has reduced staff, rationalized manufacturing facilities and outsourced non-core business functions for such purpose.

Share buybacks should also help drive the bottom line. Amgen intends to return cash to shareholders through dividends. The company's target is to return more than 60% of adjusted net income in the form of dividends and stock repurchases to stockholders through 2015.

“Looking forward, Amgen's Board of Directors has authorized an increase for the company's stock repurchase program to a total amount of $10 billion. We intend to use this to accelerate our share repurchase program, reflecting our confidence in the outlook and the long-term value of the company and the attractive interest rate environment,” said Jonathan M. Peacock, CFO.

Amgen received a major boost in 2010 when it gained approval for its lead pipeline candidate, Prolia/Xgeva (denosumab).

Furthermore, the company will collaborate with GlaxoSmithKline. Both companies will share commercialization of denosumab for osteoporosis indications in Europe, Australia, New Zealand and Mexico.

The global economic downturn and increase in unemployment have resulted in a significant increase in the number of people whose private insurance coverage has been reduced or eliminated. Moreover, healthcare costs which were previously being covered by employers are now being borne by the employees themselves.

All these factors have resulted in a change in spending pattern which could have a negative impact on revenues.

Although Amgen has a dominant presence in its current markets, there is no guarantee of success in the large osteoporosis and cancer therapeutic markets.

If Amgen's late-stage pipeline disappoints, it could be forced to seek a large acquisition, which could be dilutive to current shareholders.

Last quarter results

International products sales have led the 9% increase in the firm's top-line expansion. Sales jumped 6% with Neulasta and Neupogene while Xgeva's sales reached $100 million in the U.S. Xgeva is the firm's new cancer drug.

Sensipar/Mimpara sales jumped 18%, sales of Vectibix jumped 13%, and sales of Nplate increased 28%.

The firm improved gross margins, but higher R&D and selling and marketing expense limited earnings expansion. SG&A increases were driven by investments in the expansion of its international operations and in the launch of XGEVA.

Adjusted earnings per share have increased by 3% compared to 2010.

Valuation

The fair value estimate for Amgen is $68 per share. It has risen from $65, based largely on the expected reduction in the number of shares after the $5 billion tender offer in December 2011.

Sales of Prolia/Xgeva are expected to reach $5 billion, with more than $3 billion from Xgeva alone. Unfortunately, ESA sales growth should remain in negative territory for the foreseeable future. Sales growth from Prolia/Xgeva and Nplate should largely neutralize this pressure on top-line sales.

Sales are expected to be flat in the next five-year period.

Amgen's 39% operating margin should decline by about 300 basis points during the next 10 years, as a smaller percentage of sales will stem from older, more-profitable biologics.

EPS growth rate averages are 6%, largely due to continued share repurchases.

Management & Stewardship

CEO and Chairman Kevin Sharer has boosted sales and profitability, which have reached unexpected rates in 2011.

He has been amply rewarded for his efforts.

The firm has made some positive changes that boost the power of individual shareholders and reduce takeover defenses, opting for a declassified board, majority voting and no poison pill.

Rating: 2.0/5 (8 votes)

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