Sunday, March 30, 2014

Amgen: Overlooked, Worth Buying, Morgan Stanley Says- 04/01/2014
further readings: 
Topic company: Amgen


  1. Sources: Bloomberg, company 10K, 10Q, MD&A, Morningstar Direct, Seekingalpha

    Business Overview
    Amgen is a biotechnology medicines company that discovers, develops, manufactures, and markets medicines for severe diseases. The company focuses on areas of high unmet medical needs, and concentrates on developing human therapeutics from cellular and molecular biology innovations.
    Amgen operates in one business segment: human therapeutics.
    (Reference items: 2013 rev 18.7 B
    Major products
    In FY 2013, Enbrel 24% of rev, Neulasta 24%, Epogen 10%, Aranesp 10%, other therapeutics accounted for 29%, other revenues 3%.
    Top four products contributed about 70% of total revenue in 2013. US market provided 78% of Amgen's revenue, total ROW provides the rest 22%.
    The company's revenue has grown at a CAGR of 9.5% over the past three years.
    I chose BI US mature valuation peers as its Comps for performance benchmark and valuation.
    (Peers: Gilead, Biogen, Celgene)
    Amgen's revenue is lower than industry average, 8.2% compare with 16.8%; ROE is also lower, 12.2% compare with 15.4%. Amgen's P/FCF multiple is lower than industry median, 16.9 compare with 31.8, its PEG ratio is 1.9, higher than industry median of 1.06.

    FCF is stable, about 30% of rev for the past 5 years.
    R&D expenditure to net rev is 22% in 2013, 2% higher than last 3 year avg.
    COGS decreased .5%, from 18.5% to 17.9%, but is still higher than historical avg.

    Economic Moat
    Amgen's products are vulnerable to biosimilars; 2 major products Neulasta and Neupogen face direct biosimilar competition in Europe, and will compete with generic products in US by 2015.
    Nevertheless, generic pressure for biologics won't be so severe as for traditional pharmaceuticals, primarily due to high cost of clinical trials and complicated manufacturing process.

    Amgen's pipeline:
    - Amgen has 16 drugs in pipeline, and they are in the final testing phase with most of them to announce pivotal findings this year.
    - Past years' revenue growth lags behind it peers, but 2014 it is of pivotal importance in terms of the research of its final stage drugs.
    - Amgen received FDA approval of Prolia and Xgeva (for treatment of osteoporosis and fractures prevention),data showed superior trial results to Novartis' blockbuster Zometa. Total sales of these products increased more than 200% in 3 years, and now they contributes 10% of total revenue in 2013.

    - Regulation pressure: thought the biotech industry is still booming. It is uncertain how biotech drugs' can sustain pricing durability in a macro health-care reform and austerity environment. Recently, Gilead was requested a briefing to the congress to explain its pricing of 84,000 hepatitis C treatment. Trigged by concerns over Gilead's pricing power, the Nasdaq biotech index was down by 14% in March,2014.
    - Sales growth was driven by unit sale price increase not unit growth. Amgen is becoming more reliant on its US pricing power for growth. Top line can be affected by competition.

    Amgen is a leader in biotechnology-based human therapeutics, it has diversified portfolio and many of them have leading market shares. Most patents expire in years later than 2020, and expiration will unlikely to cause severe damage to biotech companies.Amgen's acquisition of Onyx bolsters the firm's therapeutic oncology portfolio with Nexavar and Kyprolis. In addition, it has a strong product pipeline, with most of them releasing phase 3 trial results this year. Valuation is fair, with a P/E of 17, and P/FCF of 16.9.
    I recommend to buy or hold this stock, depending on the whole biotech segment momentum.

  2. Source: Bloomberg, company 10K, research report from EvaluatePharma

    Amgen, established in 1980, is a California based biotechnology company focused on development of human therapeutics & medicines based on advances in recombinant DNA & molecular biology.

    Segment in 2013:
    Product sales: 97.4%
    Other: 2.6%

    US: 77.8%
    Outside US: 22.2%
    2013 revenues increased 8%, 3-yr CAGR: 6%
    2013 net income growth 17%, 3-yr CAGR: 11%

    2013: 5598/18676: 30%
    2012: 5193/17265: 30%
    2011: 4552/15582: 29%
    5598/6291: 89%
    5193/5882: 88%
    4552/5119: 89%

    Use of free cash flow:
    Dividend: 1.4 billion, 25% of FCF
    Share repurchase: 0.8 billion, 14% of FCF
    Debt repayment: 3.4 billion, 61% of FCF
    M&A: acquired Onyx Pharmaceuticals, Inc., a leading biopharmaceutical company producing cancer durgs. Cash paid to acquisition: 9 billion

    Gross margin: 82.08% in 2013, 81.47% in 2012, 84.42% in 2011, Industry avg: 84.98%
    Operating margin: 31.41, 32.30, 27.67, Industry avg: -23.04%
    Net income margin: 27.21, 25.17, 23.64
    ROE: Industr avg: -3.63%, AMGN: 24.69%

    R&D expense/sales: 22% in 2013, 19% in 2012, 20% in 2011
    Oncology & Immunomodulators: 67.8% of R&D expense

    Phase 3: 16 projects, Phase 2: 17, Phase 1: 35, Pre-clinical: 15, Research project: 7
    Product together, especially AMG 145, Romosozumab: expected total revenue at about 70M in 2015 to over 1.1B in 2018

    Consumer: hospitals, doctors, drug salers and distributors

    What could go wrong?
    Revenue: unable to get approval from regulation institutions. Fail to generate their expected revenue.

    Expense: R&D, M&A expense. The company purchased the U.S. rights to a drug ivabradine from Servier. This innovative molecule for treatment of heart failure is already approved in many markets around the world and has the potential to provide an important treatment option for patients in the United States. The company paid 9B to M&A, almost double of FCF.

    In conclusion: highly recommended.


    Amgen is a mega-cap biotech company with a focus on products that treat cancer, anemia and autoimmune conditions.

    - U.S. 14045 77%
    - ROW 4147 23%

    CORE BUSINESS - - Revenues increased 8% driven by strong performance across the portfolio. Product sales grew 10% in the United States and 8% in the rest of the world
    - The increase in global Neulasta® sales for 2013 was driven by an increase in the average net sales price in the United States, offset partially by a decline in units.

    Product Sales (Revenue%, YoY growth%) FY 2013

    Neulasta®/NEUPOGEN® $ 5,790 32% 8 %
    ENBREL $ 4,551 25% 7 %
    Aranesp® $ 1,911 10% (6)%
    EPOGEN® $ 1,953 11% 1 %
    XGEVA® $ 1,019 6% 36 %
    Prolia® $ 744 4% 58 %
    Sensipar®/Mimpara® $ 1,089 6% 15 %
    Other products $ 1,135 6% 26 %
    Total product sales $ 18,192 100% 9 %

    pharmaceutical wholesale distributors,doctors and hospitals

    Leading biotech companies such as Biogen (BIIB), Celgene (CELG), and Gilead Sciences.

    - Profitability: an 82.08% gross margin, a 31.41% operating margin, and a 27.21% net profit margin.
    - Financial Position: AMGN's LT Debt/Equity (1.3) and Total Debt/Equity (1.5) are right in line with its peer average,
    - 2014 Guidance: Amgen expects to earn $7.90 - $8.20 per share on total revenues of $19.2 billion to $19.6 billion.
    - Total R&D expense $ 4,083
    - Pipeline: Phase 3, 14; Phase 2, 9; Phase 1, 19

    Free Cash Flow:
    - FCF in FY 2013 - $5.6 billion, 7.8% increase (from 2012)
    - FCF/CFO 89% in 2013
    - FCF/Revenue 30% in 2013

    Use of FCF
    - M&A payment of $9.4 billion related to Onyx in 2013
    - Repurchase of common stock $832 million
    - $1,415 million Cash Dividend payment
    - Strong cash flows that have enabled acquisitions, such as the 2013 purchase of Onyx Pharmaceuticals, which we expect
    PRO (what is going right now)
    - Cost control:
    - Deep Pipeline:
    - Expansion into New and Emerging Markets:
    CON (what may go wrong)
    - The inclusion of a safety-related boxed warning on the labels of Amgen s erythropoiesis-stimulating agents (ESA) Aranesp and Epogen has had an adverse impact on sales of these products.
    - Biosimilars Pose a Threat: Biosimilars are starting to have a negative impact on key products like Neupogen and Neulasta in the EU.
    - Raw material price increase: Third-party suppliers for certain of the raw materials, medical devices and components.
    - Acquisitions may result in unanticipated costs, delays or other operational or financial problems related to integrating the acquired company and business with our company

  4. Sources:
    - 2013 10K
    - Seeking alpha
    - Zacks
    - The Wall Street Journal

    Business Overview: Amgen is the world’s largest biotechnology company, with primary focus on the development of products in the areas of supportive cancer care, nephrology and inflammation.

    It has only one business segment human therapeutics. 97% of sales are from product sales. Revenue by products (as % of product sales revenue in 2013)
    - Neulasta/ NEUPOGEN 32%
    - Enbrel 25%
    - Epogen 11%
    - Aranesp 10%
    - XGEVA/Prolia 10%
    - Sensipar/Mimpara 6%
    - Other Products 6%

    Core Products: Neupogen: a white blood cell stimulant & Enbrel, an arthritis and psoriasis drug.

    Revenue by geography: 77% from US market and 23% rest of the world.

    - In the U.S., main customers are pharmaceutical wholesale distributors. In Europe, primary customers are wholesale distributors and healthcare provider, including physicians or their clinics, dialysis centers, hospitals and pharmacies.
    - Three largest wholesalers are AmerisourseBergen Corporation, McKesson Corporation and Cardinal Health, Inc, each accounted for more than 10% of total revenue in the last three years

    Financial Overview:
    - FCF: 5.6 b by 2013, increased 8% from 2012, FCF was relatively stable in the past three years
    • FCF as % of Rev: 30% in 2013 &2012, 29% in 2011, 34% in 2010
    • FCF as % of OCF: 89% in 2013, 88% in 2012, 89% in 2011, 90% in 2010
    • Use of FCF:
    o Return Capital to SH: Share Repurchase: 14% & Dividend payment: 25%
    o Debt Repayment: 60% of FCF
    o Acquisition: acquired Onyx Pharmaceuticals using FCF and new debt issuance
    - R&D expenses: 22% of product sales in 2013. Increased 21% mainly because of an increase in the later stage clinical programs
    - SG&A expense: 29% of product sales in 2013, increased 8% from 2012 mainly because of the addition of Onyx
    - Profitability: net profit margin 27% vs. Industry average 6.56%. NPM Increased in the last three years.
    - Financial position: 33.5 billion debt outstanding by year-end 2013, with a 1.34 D/E ratio. This increased heavy level of debt was raised for the acquisition of Onyx

    What is going right?
    - Diversified product portfolio: 2 core products as well as 7 other sales driven products that it can rely on for revenue
    - Deep Pipeline: 16 drugs in its late-stage pipeline, with most of them expected to indicate pivotal findings in the present year
    - stronger international presence: met the goal of gaining a presence in more than 75 markets two years ahead of schedule
    - Preferable Dividends growth: Dividends have grown at a CAGR of 7.3% over the past twelve quarters increasing at an average of 30% per year
    - Margins expected to increase after the termination of the company s co-marketing agreement with Pfizer for Enbrel
    - Grow through acquisition: acquisition of Onyx strengthened its presence in the oncology market

    What can go wrong?
    - Revenue:
    • Certain of existing patents on principal products have recently expired or will expire over the next few years, and thus will increase the competition thereafter, including from biosimilars
    • Disappointing results from late-stage studies of the pipeline
    • Regulatory issue on current products: including safety problems or signals arose after the products are evaluated in clinical trails
    - Expenses:
    • Unable to continue cost cutting projects. The company has undertaken initiatives like staff reduction, rationalization of manufacturing facilities, and outsourcing of non-core business functions to help control costs
    - FCF:
    • Further acquisition strategies may put pressure on FCF and financial position

    Overall speaking, long-term hold