By Ivan Deryugin
As the world's largest biotechnology company, with a market capitalization well on its way to $70 billion, Amgen (AMGN) represents the "old guard" of biotechnology. The company has been in business for over three decades and is the only biotechnology company to pay a dividend (with a respectable yield of over 2%). However, Amgen's performance in 2012 showed that the company is far from being a stodgy relic of the past. AMGN rallied well over 30% in 2012, driven by judicious use of capital - buybacks, dividends, and acquisitions - and a resurgent pipeline. While Amgen's earnings growth is, in fact, set to slow in 2013 relative 2012, continued pipeline investments and aggressive deployment of capital should lead to a profitable 2013 for Amgen's investors, especially with shares still trading at less than 16x earnings.
Q4 Earnings Preview: Wrapping up 2012
Amgen is set to report Q4 2012 earnings after the close of trading on January 23. Per consensus estimates provided by Reuters, Amgen is forecast to post EPS of $1.49 on revenues of $4.4 billion. Should Amgen meet these estimates, it will represent year-over-year EPS growth of 23.14% (Q4 2011 EPS came in at $1.21), and revenue growth of 10.75% (Q4 2011 revenue came in at $3.973 billion). The disparity in these growth estimates reflects Amgen's aggressive use of capital on buybacks, on which Amgen has spent $3.39 billion in the first 3 quarters of 2012 alone. However, buybacks alone cannot sustain EPS growth in the long run. Earnings growth at Amgen will come from the expansion of its product portfolio (both in the form of new drugs and better commercialization of existing drugs), and fortunately, Amgen is making progress on this front. It is why CEO Robert Bradway has said that only 30% of Amgen's EPS growth through 2015 will come from buybacks, and that 70% of EPS growth will be driven by "core" increases in net income.
Amgen's profit sharing agreement with Pfizer (PFE) regarding Enbrel ends in 2013, and Amgen is ensuring that once this agreement ends it is well positioned to maintain Enbrel's leading position in the marketplace. The company has consolidated all sales activities under itself and is expanding advertising of Enbrel, as well as streamlining access to Enbrel. In addition, Enbrel is gaining share in the rheumatology and dermatology biologics market, and Amgen is likely to provide an update regarding Enbrel's performance when it reports Q4 earnings. XGEVA is also gaining share, with the drug now controlling 25% of the European SRE market. XGEVA sales grew 97% in Q3 2012, and with the drug continuing to gain share in the United States as well, Q4 XGEVA sales are likely to continue growing at a good pace. Amgen's Neupogen franchise has also received some breathing room after sales fell 6% in Q3 2012. Teva's (TEVA) competing generic is barred from being sold until November 2013 per the terms of its settlement with Amgen, giving Amgen several additional quarters to strengthen its defenses. On the company's Q3 call, CEO Robert Bradway stated that, "With respect to a competitor [Teva] entering the Neupogen area, we obviously have the benefit of a long established track record of efficacy and safety and detailed, deep relationships with the customers that prescribe Neupogen and Neulasta. And we would expect to continue to engage with prescribers around the benefits of Neulasta and Neupogen in the face of a competitor. And as we have said through time, this is still a market where not every patient who is appropriate to be treated with a growth factor like Neupogen or Neulasta receives it first in every cycle. And so we'll continue to try to make sure that this product is used to patiently -- appropriately with all patients who'll benefit from it. So that's where we stand, and we'll watch obviously with interest that potential competitor and any others as well." I expect that Amgen will provide some detail on its Q4 call regarding its Neupogen franchise and how it is addressing looming competition.
Pipeline Progress: Leadership Has its Benefits
As the world's largest biotechnology company by both market capitalization and revenue, it's only natural that Amgen has the biotechnology sector's largest pipeline, with 43 different clinical programs currently in progress (18 Phase I trials, 13 Phase II trials, and 12 Phase III trials). And while statistics suggest that the majority of the drugs Amgen is currently working on will fail (only 10% of drugs make it through clinical testing), Amgen has the financial resources to continuously fill its pipeline while moving its existing drug candidates through the clinical trial process. AMG-785, currently in Phase II testing for the treatment of "Bone-related conditions, including postmenopausal osteoporosis and fracture healing" is moving through the clinical trial process. Amgen is enrolling patients into 2 separate Phase III trials of AMG-785 in women with post-menopausal osteoporosis. And Phase II data regarding AMG-785 in fracture healing is set to be released in the first half of 2013, and it's likely that Amgen will give a more detailed time frame on its Q4 2012 conference call. Amgen may also give an update on the timeframe for the start of Phase III testing for AMG-827, which is being developed for the treatment of severe psoriasis (AMG-827 is being developed in partnership with MedImmune, a unit of AstraZeneca [AZN]).
Amgen's annual analyst day will occur on February 7, and the company will provide a detailed overview of its pipeline and where its clinical programs stand. Amgen's pipeline has a diverse array of drug candidates, and the spotlight has been for some time on the company's late stage assets. I expect that Amgen will devote some attention to its earlier-stage pipeline assets (the company has 18 Phase I candidates), which include 2 lupus drugs and multiple oncology assets.
Financial Overview: Where Amgen Shines
Investing in biotechnology companies does not always need to be about the strength of clinical data or the pace of revenue growth. While Amgen scores well on both marks, where the company really shines is its financial position and capital deployment strategy. Amgen has come to realize that in order to stay innovative and not succumb to the lethargy that strikes so many larger companies (in terms of both innovation and stock price), it must deploy capital aggressively across a wide variety of channels. Fortunately, Amgen's solid balance sheet affords it ample ability to do so.
Amgen ended Q3 2012 with $25.374 billion in cash & investments, and debt of $26.478 billon. How can Amgen have a solid financial position with net debt of $1.104 billion? The answer lies in both the trajectory of Amgen's balance sheet, as well as the composition of its debt. In Q3 2011, Amgen had net debt of $787 million, meaning that Amgen increased net debt by only a few hundred million over the course of the year, despite deploying billions on buybacks, dividends, and acquisitions. And CFO Jonathan Peacock forecasts that Amgen will return to a net cash position during the course of 2013. Amgen's financial position is further enhanced by the composition of its debt. The company's debt maturities are spread out fairly evenly, with maturities as far out as 2043. The table below lists Amgen's debt maturities, which are available in the company's latest 10-Q filing (years that are skipped imply that there is no debt maturing that year).
Amgen Debt Maturities
Amount (in Millions of $)
Amgen's debt maturity profile allows it ample ability to continue its policy of aggressive capital deployment, for there are substantial jumps in debt maturities in the years ahead. And with over $5 billion in operating cash flow during the first 9 months of 2012, Amgen's financial position is likely to remain secure. As debt matures, Amgen has the ability to "roll over its debt," all while continuing to decrease its net debt position (and eventually begin building up its net cash position). But, however strong Amgen's financial position is, it cannot mask Amgen's age. While Amgen is still growing both sales and earnings, its days of torrid growth have long since passed, and in order to drive its stock price even higher, Amgen must become more aggressive when it comes to deploying its capital, especially when it comes to addressing its most obvious weakness: competition.
Competition: A Sign of Age, But a Chance at Redemption
While being the world's largest biotechnology company does have its benefits, it also comes with extra "baggage," namely, competition. Unlike many smaller biotechnology companies, Amgen faces the problem of large pharmaceutical companies and the fact that it cannot simply compete on the clinical efficacy of its drugs. Amgen has to aggressively market its drugs, as well as spend millions on its sales force, and these costs do have an impact, as shown by Amgen's SG&A expenditures relative to its large-cap peers.
"Big 4 Biotechnology" SG&A Expenses, Q3 2012 (in Thousands of $)
Q3 2012 Revenue
Q3 2012 SG&A Expenses
SG&A as a % of Revenue
The average level of SG&A expenditures at the Big 4 biotechnology companies is 21.47%, whereas Amgen spends over 26% of revenues on SG&A. It's one that Amgen should rectify in order to boost its margins. Fortunately, the company is doing just that. On the company's Q3 call, CFO Robert Peacock stated:
"We have broad operational efficiency programs that are getting started and under way across SG&A, cost of sales and in the R&D area. But we're also investing in a very targeted way in growing the business for the future around the pipeline, around building our biosimilars business and in building out the business internationally. So yes, you'll see increasing operational efficiencies coming through over the year or 2 ahead, but you'll also see us continuing to invest in driving strategic growth for the business for the future as well. So again, we'll keep operating expense growth at or below revenue growth, but we'll also continue to invest strategically in driving the top line. Amgen is making progress on its cost-cutting program."
While Amgen's Q3 2012 SG&A expenses accounted for over 26% of revenue, a high level relative to peers, they were still 3.18% lower than Q3 2011, where SG&A expenses accounted for 29.27% of revenue. And with Amgen's cost cutting initiatives still in progress, SG&A expenses should continue to slide, boosting Amgen's margins as it expands its product portfolio and grows revenue.
While Amgen's days of torrid growth have long since passed, the company still has much to offer investors. An expanding product portfolio, a diverse pipeline, and a solid financial position should lead to a banner 2013, and if Amgen becomes more aggressive with its capital deployment strategies, then upside is likely to be even higher. Not all biotechnology portfolios should be composed of only development-stage companies. As the world's largest biotechnology company, Amgen offers investors the opportunity to balance their portfolios, adding some stability (as well as a growing dividend) to what is often a volatile and unpredictable sector.
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