Amgen: Should I Just Sit and Wait?

Running financial numbers and researching its competitors reveal that I need to sit on my itchy hands

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Mar 18, 2016
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Amgen (AMGN, Financial) just won a patent case against competitors Sanofi (SNY, Financial) and Regeneron Pharmaceuticals Inc. (REGN, Financial) for one of the drugs in its pipeline, Repatha (Evolocumab).

According to its latest proxy statement, Repatha is just one of the four drugs that Amgen has filed for regulatory approval as of late 2014. The U.S. Food and Drug Administration said on its website that it takes roughly 10 months to approve a drug that is on review. Nevertheless, I have not gathered any information that the aforementioned drug will be approved soon.

According to Amgen, Repatha is its innovative biologic molecule that reduces LDL cholesterol.

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(Page 1 of Amgen’s 2014 annual report)

For a quick pharmacy review, there are two types of cholesterol in a human body: LDL, or low-density lipoprotein cholesterol, is the bad cholesterol. HDL, or high-density lipoprotein cholesterol, is the good cholesterol. LDL causes formation of plaques inside the body’s arteries resulting in possible atherosclerosis. Further buildup may cause ischemia or lack of blood flow. A heart attack ensues if ischemia happens in an artery supplying the heart, and stroke when the affected artery is supplying blood to the brain.

There are several other statin-drugs out there by different pharmaceutical companies:

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(Source: Google and Good Rx)

There is plenty of competition out there.

Revenue contributions according to the corresponding recent company 10-Ks revealed that Pfizer (PFE, Financial) made 4% of its revenue from Lipitor, and Merck (MRK, Financial) gained 0.62% of its sales from Zocor. AstraZeneca (AZN, Financial) does not have any competition for its legacy cholesterol-lowering drug Crestor, which contributed 21.22% of its 2015 total sales. Crestor was first approved for treating patients with high cholesterol in 2003, and its medicinal purpose was later expanded in 2010 when the FDA approved its use for patients with increased risk of heart disease.

Crestor is approved in 109 countries; AstraZeneca Pharmaceuticals revealed that there are ongoing litigation and patent concerns with Crestor).

In summary, Amgen developing another medication for high cholesterol may seem a high-risk and low-reward situation – high risk because of high research and development expenditure ($100 million to $200 million) and low reward because of the highly competitive environment for the drug. But the biosimilar drug business appears to be at its growth stage. JPMorgan, in its 34th Annual Healthcare Conference, predicted that the biosimilar industry will become a $20 billion market by 2025.

Another helpful chart by JPMorgan is the following:

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Biosimilars can be less costly for the insurers and at the same time effective for the patients. Further, it is impossible to copy a biosimilar given its makeup; this therefore is in itself protective to threats of generic drug developments.

In addition to the peer review a month before, Amgen has one quantitative quality that may inhibit conservative investors from participating: its debt-to-equity ratio.

Debt to equity

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* "Group" included Abbvie (ABBV, Financial), Biogen (BIIB, Financial), Celgene (CELG, Financial), Gilead (GILD, Financial), Johnson & Johnson (JNJ, Financial), Pfizer and Roche Holding (RO).

Nevertheless, Amgen provided good-quality performance in other aspects.

Revenue and profits in millions

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Book value and growth

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Free cash flow and growth

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Dividend and share buyback as percentage of profits and free cash flow

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All these numbers would inevitably induce interest for any value investor. Further, its ongoing debt can be paid off by its cash at this moment.

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An outstanding company, indeed.

Price action

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Valuations

Price to earnings

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Price to book

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Intrinsic valuations

Industry average application

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Standard & Poor's 500 application

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Simple multiple

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Capital Asset Pricing Model (CAPM)

I will use 8% 10-year growth and 4% terminal growth in the model.

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Other data not included in the graph were as follows: 10-year Treasury rate of 1.87%, beta average of 0.95, equity risk premium of 6%, corporate tax rate of 13% and weighted average interest on debt of 4.17%.

Risks

Other pharmaceutical companies are targeting Amgen’s biggest revenue contributors: Neulasta and Enbrel.

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Who are these companies?

Novartis (NVS) and Coherus BioSciences (CHRS) in partnership with Baxter International Inc. (BAX) are aiming to produce biosimilars for both medications. This indeed is a threat, as both Neulasta and Enbrel represented 47% of Amgen’s 2015 total revenue.

In summary, Amgen is an outstanding company, but sales risks are emerging. Amgen has the following list of upside and downside in terms of intrinsic value calculation:

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Disclosure: I do not own shares of Amgen or any company mentioned (except for Pfizer, Gilead and Johnson and Johnson) and am not planning to initiate any position in the next 24 hours.