Equity Position: Amgen (AMGN)
Our biggest winner in 2014 was our equity position in the biotechnology company Amgen. In our last letter and at the Robin Hood Investment Conference, we highlighted Amgen as a hidden value situation where investor skepticism in three areas – R&D productivity, operating efficiency, and capital allocation – had obscured the company’s fundamental value.
From our perspective, Amgen’s valuation discount to both biotech peers and even slower- growing pharmaceuticals was unwarranted given Amgen’s compelling mix of long-duration, highly cash-generative mature assets and soon-to-launch blockbuster products. To create shareholder value, we made three specific recommendations: 1) focus the company’s R&D efforts; 2) provide long-term margin guidance demonstrating a commitment to reducing a bloated cost structure; and 3) create clarity on additional shareholder returns.
Apparently, Amgen Chairman and CEO Bob Bradway recognized many of the same sources of investor frustration and he has responded with a company-wide transformation initiative. At Amgen’s Analyst Day in October, Mr. Bradway directly addressed two areas of shareholder skepticism: operating margins and capital allocation. The company shared long-term operating margin and cost reduction targets with investors, noting that 2018 spending will not exceed 2013 levels. This expense discipline should help drive operating margins from 38% to at least 52% over that period. In addition, Amgen guided to a 30% increase in its quarterly dividend and accelerated the resumption of its share repurchase program. The long-term vision and discipline presented at the Analyst Day combined with several subsequent positive clinical pipeline events helped Amgen return nearly 45% to shareholders in 2014, the best performance of all mega cap US healthcare companies and Amgen’s highest annual return since 1999.
Even so, we feel this story is still in its early innings and there is still substantially more value for Amgen shareholders to realize. We believe the company can be more aggressive with its share repurchase program, particularly since the stock remains undervalued at current levels. We also remain focused on Amgen’s R&D productivity, given the company’s disappointing returns on its $30 billion in R&D spending over the past decade. While changes to R&D can take longer to implement, we expect that Mr. Bradway will remain attentive to this area. We hope that the company’s recent immuno-oncology partnership with Kite Pharmaceuticals exemplifies Amgen’s increasing efforts to broaden its R&D capabilities in a financially responsible way. Our work suggests further meaningful opportunities exist to improve and optimize internal processes, particularly around decision-making and project selection. Finally, we believe Amgen should provide more granular detail (e.g., R&D spending by therapeutic area) to investors to provide comfort that its current R&D decisions reflect a careful approach to managing capital.
We look forward to continuing to work with the company and our distinguished Third Point Scientific and Medical Advisory Board Members – Dr. David Agus, Dr. Geoff Ginsburg, and Dr. David Parkinson – to further help tune up a world-class engine of scientific discovery and innovation.
From Daniel Loeb (Trades, Portfolio)’s Third Point Q4 2014 Investor Letter.
