Amgen Inc. (AMGN, Financial) reported quarterly results at the beginning of August that came in ahead of Wall Street analysts’ estimates and showed improvement against the prior year. Yet, shares have decreased more than 8% since then, even as the S&P 500 index has grinded higher by 1.5%.
Part of this decline is likely due to some of Amgen’s more important products showing declines. However, the company also has several newer drugs that continue to produce impressive growth rates.
As a result of this high single-digit decline, shares are now trading below their intrinsic value by a sizeable margin while offering a yield that is far superior to the stock’s long-term average. Let’s look closer at Amgen to see why I feel that the stock represents a good value at this time.
Earnings highlights
Amgen reported second-quarter earnings results on Aug. 3. Revenue grew 5.2% year-over-year to $6.5 billion, which was $75 million better than expected. Adjusting for the write-off of an acquisition, net income of $2.5 billion was up slightly from the prior year while adjusted earnings per share of $4.38 was an 18 cent, or 4.3%, increase from the previous year. A lower share count accounted for the difference in increases. Adjusted earnings per share was also 37 cents above estimates.
Total product sales improved 3% and were aided by an 8% gain in unit volumes, particularly in newer products. Lower net selling prices were a partial headwind to results. Compared to the first quarter of the year, product sales were higher by 9% and volumes grew 6%.
Amgen’s products mostly performed well, though there were a few areas of weakness:
- Enbrel, which is used to treat rheumatoid arthritis, declined 8% to $1.1 billion. Volumes were lower by just 1%, but the main headwind to results was lower net selling prices, something that is likely to continue due to pricing pressure.
- Prolia, which treats osteoporosis, grew 24% to $814 million. This growth was largely due to a recovery from Covid-19 levels as volumes were up 20% year-over-year. New and repeat patients continue to pick up as osteoporosis diagnosis rates in the U.S. were at approximately 90% of pre-Covid-19 levels.
- Otezla, which is used to treat inflammatory diseases, decreased 5% to $534 million. Volumes were up 5%, but this was more than offset by lower net selling prices and a change in estimated sales deductions. On the plus side, new-to-brand prescription volumes improved 10% even as patient visits remain 15% below 2019 levels. This product was acquired as part of the merger agreement between Celgene and Bristol-Myers Squibb (BMY, Financial).
- Xgeva, which is used in the prevention of bone fractures, was higher by 12% to $488 million. This was another product where recovery from the pandemic was the main driving force in results.
- Neulasta, used to reduce infections in chemotherapy patients, fell 18% to $486 million as biosimilar competition has pressured both volumes and selling prices.
- Repatha, used to control cholesterol, improved 43% to $286 million. Volumes were up 49% as more Medicare Part D patients have received the drug. Amgen lowered the price of this product in 2018 in order to capture a larger share of the treatment market. This has come to fruition as Repatha has now been prescribed to more than one million patients. The company expects that pricing will continue to go lower, but a higher patient base should help to offset this.
- Kyprolis, used in treatment for multiple myeloma, grew 11% to $280 million. This product benefited from higher growth and an increase in pricing.
Amgen also repurchased $1.6 billion worth of stock during the quarter. The company has $3.9 billion, or just over 3% of its current market cap, remaining on its share repurchase authorization. Free cash flow declined to $1.7 billion from $2.7 billion, mostly due to the timing of tax payments. Selling, general and administrative expenses were higher by 6% while research and development increased 11%.
Amgen also reaffirmed its guidance for the year, with revenue expected to be between $25.8 billion and $26.6 billion and adjusted earnings per share guided for a range of $16.00 to $17.00.
Takeaways and valuation analysis
Amgen's current lineup of products looks poised to deliver solid results as they are approved for additional uses. For example, Otezla is expected to be approved for mild-to-moderate psoriasis by the end of 2021. This product is expected to be launched in China this year as well. Combined, the new approval and market entrance will provide a higher potential patient base.
While Amgen doesn’t have any single product that will carry the company forward, it does have a number of products that should see solid peak sales numbers. Prolia and Xgeva could combine for $6 billion in sales by the middle of this decade, compared to $4.7 billion in 2020. Both products face a patent expiration date of 2025 in the U.S. Repatha is expected to see peak sales in the range of $2.5 billion to $3 billion and doesn’t lose patent exclusivity until 2027. Kyprolis, which also doesn’t go off patent until 2027, is estimated to have peaks sales of $1.5 billion.
This isn’t to say that the Amgen doesn’t face challenges. Enbrel and Neulasta, two of the company’s top five selling products, continue to face pricing pressure. In Neulasta’s case, biosimilar competition continues to be an issue.
Offsetting this will be the strength of current products as well as the company’s pipeline. For example, Lumakras, which just received approval to treat lung cancer in the U.S. in May, could see $1.6 billion in sales worldwide by 2025 and more than $3 billion by the end of this decade. Amgen’s asthma drug Tezepelumab, which the company shares with AstraZeneca PLC (AZN, Financial), could achieve peaks sales of more than $2 billion. This drug was submitted for approval in May of 2021 and Amgen will receive slightly less than half of sales based on its agreement with AstraZeneca.
Amgen also remains a serial repurchaser of its own stock, having reduced its share count by 3.1% annually from 2011 through 2020. This has aided earnings per share growth, but net profit still doubled over this period of time.
Shares yield 3.1% today, which is nearly a full percentage point above the stock’s 10-year average yield of 2.2%. The company has also raised its dividend for 10 consecutive years and has a five-year compound annual growth rate of nearly 10%.
With shares trading at $221, the stock is trading with a forward price-earnings ratio of 13.4, matching the long-term average multiple.
That said, the stock looks inexpensive compared to the GuruFocus Valuue chart:
Amgen has a GF Value of $250.88, equating to a price-to-GF-Value ratio of 0.88. Investors purchasing shares today could see a potential return of 13.5%. Adding in the dividend, total returns could reach the mid-double-digit range.
Final thoughts
Amgen posted solid year-over-results as the company recovered from the pandemic. Certain products saw declines, but the company’s newer ones showed gains. The company also has a decent pipeline that should help support declines in off-patent products.
Amgen is also one of the most shareholder friendly companies in its industry, and the stock provides a much higher than usual dividend yield. Lastly, the stock looks to be undervalued after the recent selloff and could provide mid-double-digit total returns from current levels. Due to these factors, I view Amgen as a buy today.
