Amgen is an American biopharmaceutical company and the world’s largest independent biotechnology firm. The company is operating in a booming industry and surprised with strong Q2 results. In the long term, it offers an attractive growth perspective driven by a strong product pipeline.

Market outlook: The biopharmaceutical industry is highly profitable and grows at twice the rate as conventional pharma

Biopharmaceuticals generate a global sales volume of $163 billion, says McKinsey, which is about 20% of the whole pharma market. With an annual growth rate of more than 8%, biopharma grows at more than twice the pace than conventional pharma and McKinsey expects this trend to continue.

As biopharmaceuticals are efficient and can treat diseases which can’t be cured with conventional products, companies can charge high prices. That leads to significant profits despite high production costs and research and development expenses.

However, moving from the scientific frontier to the business mainstream, biopharma companies face the same problems as other pharma businesses. Downward pressure on prices, especially in emerging markets, leads to the development of biosimilars which take away revenue from branded products.

Q2 revenues were better than expected and profits increased, which is also due to effective cost cuts

Q2 results came in strong. The company reported revenues of $5.37 billion, which is a 4% increase compared to Q2 2014. Adjusted earnings per share increased by 8% to $2.57. These numbers are better than Wall Street’s estimates.

Amgen is targeting an operating margin above 50% within a few years. Therefore, the company has started to cut costs. Last year, the management announced to lay off about 20% of its workforce in order to save $1 billion per year.

According to their quarterly conference call, research and development expenses were down 6% compared to the year before. As a result, Amgen’s operating margin rose to almost 49%.

The patent of blockbuster drug Neulasta will expire in 2015, but Amgen has a strong and innovative product pipeline which will offset potential losses

Amgen’s most successful products are Neulasta/Neupogen and Enbrel. Neulasta/Neupogen is a white blood enhancer and delivers $5.3 billion a year in revenue. The anti-inflammatory therapy Enbrel has produced $4.6 billion in sales within the United States over the trailing four quarters.

However, Neulasta’s patent will expire in October 2015. When that happens, it will face intense competition from generic drugs. The arrival of such a replacement in the market can cause a loss of more than 80% in revenue of the branded drug. However, Amgen tries to protect its revenue with an innovative body injector, that allows the patients to get their injection at home instead of returning to the hospital.

On the contrary, Enbrel’s patent guarantees exclusivity in the Unites States until 2029. Amgen’s management announced to invest in the drug’s development and they believe it’s on a good way to become a $5 billion brand.

Moreover, Amgen launched new promising products, for example Repatha, which just got the permission for the European market.

Small and mid-sized companies are the most interesting acquisition targets, but Amgen’s management doesn’t exclude big transactions

In 2013, Amgen bought its much smaller rival Onyx for $10.4 billion. It was the fifth biggest transaction ever in the industry and Amgen’s second biggest acquisition after Immunex 14 years ago ($16 billion).

However, CEO Robert Bradway announced, that the company is more interested in small or mid-sized companies that are early in their development process. Those transactions are more risky, but if an early stage drug becomes successful, this strategy will pay huge dividends.

Nevertheless, CEO Bradway doesn’t exclude bigger acquisitions: “Our focus is on earlier-stage transactions that we think can bring innovation to the company that we can add value to. But we have the flexibility in the balance sheet if attractive opportunities arise that are at the larger size.”

Dividend yield equals S&P 500 average, P/E ratio indicates Amgen is slightly undervalued

Amgen pays a dividend of $3.16 per share which amounts to a dividend yield of 1.90%. That’s slightly lower than the average of all S&P 500 companies (1.96%). The company paid its first dividend in 2011. Since then the dividend has grown by 182% and they have increased their payout every year.

Moreover, Amgen generated a free cash flow of $7.8 billion in 2014 and plans to payout $2.4 billion in 2015. Hence, the free cash flow payout ratio is about 30% and there is enough space to grow the dividend further.

Amgen has a trailing P/E ratio of 21.35x, higher than the S&P 500 average of 18x. However, it is still lower than the industry average of 24.82x (as of Dec 31, 2014).

Amgen sits on a high amount of cash, but most of it is held by foreign subsidiaries

The company has $30.7 billion in long term debt and about $6.9 billion in current liabilities. The interest coverage ratio is 5.8x, which means the company doesn’t have any problems to meet its interest expenses.

However, they also hold about $30 billion in cash. When Amgen acquired Onyx in 2013, they took $8.1 billion of five year loans in order to finance the transaction. The reason why they didn’t use their huge amount of cash was that most of it is hold by foreign subsidiaries. Amgen keeps the money offshore, because they want to protect it from income taxes which they would have to pay if they brought the funds into the United States.

Conclusion: Amgen is the strongest player in a booming industry and will continue to grow

Amgen offers an attractive growth perspective. The company is operating in a growing market and Q2 results came in stronger than expected.

The expiration of the Neulasta patent will have a negative effect but Amgen’s product pipeline is strong enough to compensate a potential loss.

Amgen trades at a price of $161 (as of Aug 21, 2015). Considering the current size of Amgen and increasing competition, it is unlikely that the company will be able to triple its share price as it has done over the last four years. However, Amgen will continue to grow and the stock is a buy at a P/E ratio of 21.35x and a dividend yield of 1.90%.



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