Amgen Answering the $30B Riddle

Amgen (AMGN) was a rare earnings bright spot yesterday (see conference call transcript), and was also sporting a much more biotech look than we’ve seen from the company in some time. As Amgen handily beat top and bottom-line expectations, investors are left to decide if this company trading for 11x current year estimates deserves a multiple expansion that would put it closer to biotech peers like Gilead Sciences (GILD) (24x) and Genzyme (GENZ) (~35x).

I call it the $30 billion riddle; there’s at least that much in market cap up for grabs if this company can return to its previous altar of biotech stardom. With a hotly anticipated osteoporosis drug set to hit markets in 2009, broad revenue growth in the existing portfolio, and no patent fears on the horizon, the gears are aligning for a possible revaluation in the coming years.

The company’s weakest ongoing catalyst - the anemia franchise of Aranesp/Epogen - has finally turned the corner after sales bottomed out in the first quarter. Sales were up sequentially after several quarters of declines following safety concerns and an FDA über-warning label.

But first things first; here’s the relevant boilerplate numbers from the Q3 report:

EPS (excluding one-time events) of $1.23/share, 15 cents above estimates and up 14% Year-over-Year. Net earnings for the full year guided higher by 10 cents to $4.45 to $4.55

Sales up 7% to $3.9 billion, also above estimates. Lower end of full-year revenue range (2008) raised by $300 million, from $14.6B - $14.9B to $14.9B - $15.2B

Key takeaways from the conference call:

Operating margins remain stellar, above 38% in the quarter, tracking well above the 2007 average of 27%.

Sales by Region: U.S. sales were up 4% to $2.9B, while international growth reached 20% to $855 million. Excluding favorable currency impacts, international sales were up 9% YoY;

Sales by Product: Epogen sales up 5% YoY to $634 million;

Aranesp: Global sales were actually up slightly to $845 million, the first quarter of favorable comparisons in over a year. Sales definitely seem to have bottomed out in Q1 at $761 million, and have indeed gone up sequentially in two quarters now.

Neulasta/NEUPOGEN: Sales up 7% YoY to $1.192 billion, but down slightly on a sequential basis as some customers filled inventories before the close of the 2nd quarter. International sales growth (minus FX) of 11%.

Enbrel: Sales up 9% YoY to $893 million; the drug continues to make inroads in dermatology while a few new competing drugs are set to enter the market in the next 2 quarters. This product is under a revenue-sharing agreement with Wyeth (WYE), however, and provides limited leverage to the bottom line.

The all-important balance sheet is getting stronger, with over $9 billion cash on hand and free cash flow of $1.2 billion in the quarter. With an annual run-rate of over $4.5 billion in FCF, Amgen trades for less than a 11.5 multiple on this metric. No short-term liquidity issues to speak of, and the board still has $4.9 billion remaining in its existing stock buyback plan after not buying back any shares in the third quarter (a great “non-participation” move). The $4.9B is enough to retire about 9% of the outstanding shares at current prices.

Denosumab: The highly anticipated osteoporosis/cancer drug is currently in Phase 3, and the limited update we got on the conference call only stated that the process is moving along well. There is an investor conference coming up in two weeks and management is keeping tight-lipped on the commercialization status of the drug until then.

Parting Thoughts

I have some medium-term concerns over political pressure from the 2009 Administration to rein in pricing for some of the boutique, expensive drugs on the market. Amgen has several “offenders” to fit the bill here, but investors have been wrong when trying to predict the same scenarios before Clinton was elected in 1992. Amgen doesn’t have a lot of direct competition for many of its biggest drugs, and biosimilars (biotech generics) have yet to prove themselves a viable option for biotech drug substitution. Aranesp has already seen biosimilar competition and hasn’t lost any market share as a result, according to the 3rd quarter presentation.

Amgen shares appear fairly valued for a big pharma stock, but extremely undervalued as a biotech. In truth the right multiple is probably in the middle, as Amgen exhibits habits of both. Amgen has mature drugs, something most biotechs wouldn’t know anything about. But Amgen is also a company with over $3 billion in annualized R&D spending, a pipeline so flush that they sold off a dozen molecules earlier this year, and all the inherent advantages of a biotech - low generic/patent risks and high margins.

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Disclosure: Author does not hold a position in the stocks mentioned.