The stock price of Amgen (AMGN) has advanced from $88 to $102 since we covered it last November (Amgen: Equity Report And Stock Valuation). This translates to a decent 16% increase in just four months. In that report, we had derived a fair value of $96 for AMGN. Now trading at $102, is the stock overvalued? We parsed AMGN's 2012 annual report and performed an updated analysis on AMGN's valuation. Our finding suggests that AMGN's present fair value has increased to $117. In other words, AMGN may have over-extended in the short-term, but the company's long-term outlook is still promising. What has contributed to the increased valuation, you might ask? Below we highlight 4 factors that collectively contribute to Amgen's increased valuation.
Factor #1: Faster revenue growth from its new products Xgeva and Prolia. The newly approved drugs Prolia and Xgeva have just seen revenue growth of 140% from 2011 to 2012. We expect that these new drugs will be key revenue drivers for Amgen going forward. We estimate that Xgeva's revenues will reach $1B in 2015, and both drugs could be Amgen's multi-billion drugs over the next decade. The faster growth rates for AMGN's drugs are in large part attributed by Amgen's effort to expand its sales to developing countries. Indeed, the company has broadened its global footprint by acquiring pharmaceutical manufacturing and distribution companies in developing countries. In essence, Amgen is building a global distribution and manufacturing capacity similar to a traditional pharmaceutical business model. These developments will augment Amgen's growth going forward. We estimate that the increased growth potential adds $8 per share to Amgen's fair value.
Factor #2: Amgen's partnership with Pfizer to co-promote Enbrel in the United States and Canada will expire this year (November 2013). Under the collaboration agreement, Amgen currently pays Pfizer (PFE) a percentage of annual net sales of ENBREL in the United States and Canada. (Note: The details of the deal were not disclosed in either company's annual reports.) After expiration of the co-promotion term on October 31, 2013, Amgen will instead pay royalties to Pfizer for 3 years until November 1, 2016. The royalty amounts are significantly less than the profit sharing amounts Amgen used to pay Pfizer.
In Amgen's recent presentation (March 6, 2013, at the Cowen and Company Healthcare Conference), the company disclosed that the Enbrel partnership termination could add ~$800M of operating income to Amgen's income statement from 2014 to 2016. According to our calculations, the savings are close to 20% Enbrel net sales. Starting in 2017, Amgen will pay only 10%-12% of Enbrel's net sales in the US and Canada. This might translate to $200M of additional saving for Amgen after 2017. (Note: The rights to market and sell ENBREL outside the United States and Canada will remain reserved to Pfizer.)
We performed a scenario analysis and found that the extra operating incomes from Enbrel translate to an additional $13 per share to AMGN's fair value. In other words, without the windfall, AMGN's fair value would be $104 per share. With the extra operating incomes, its fair value becomes $117 per share.
Factor #3: Patent expirations for key products such as Epogen and Araqnesp will not severely impact Amgen's revenues. This is because there is significantly high hurdle for generic competition in the biological space. Essentially 90% of Amgen's therapeutic products are biologics that are based on recombinant proteins and monoclonal antibodies, which require special manufacturing expertise and facilities for large-scale production. In addition, recent FDA regulation requires biosimilars to demonstrate efficacy in clinical trials. This new regulation presents an additional hurdle of entry for generics competitors because it may require several years of development.
Factor #4: Amgen is developing biosimilar capability to produce not only its flagship biologics but also biologics products made by other companies. Amgen has announced that it is collaborating with Actavis, Inc. (formerly Watson Pharmaceuticals, Inc.) to develop and commercialize several oncology antibody biosimilar medicines on a worldwide basis. The products Amgen and Actavis are pursuing include biosimilar versions of Avastin, Herceptin, and Rituxan made by Genetech (DNA) and Roche (OTCQX:RHHBY). They are also working to develop biosimilar versions of Erbitux made by Eli Lilly (LLY) and Bristol Myers Squibb (BMY), Humira made by AbbVie (ABBV), and Remicade made by Johnson and Johnson (JNJ) and Merck (MRK).
It is important to mention that these are all blockbuster drugs with over billion dollars sales. The combined sales of these 6 antibodies are over $40B as of 2012. Amgen anticipates that it will start selling these biosimilars after 2017.
Conclusion: After factoring in these revenue drivers for Amgen, we have updated its stock valuation and financial projections. Our model suggests that AMGN's current fair value is approximately $117, with $8 in contribution from expanding new drug sales, and $13 in contribution from Enbrel profit share benefits. The current stock price is $102, and so trading at a 13% discount. The stock run has over-extended in the short-term and could be due for a correction. However, it would be worthwhile to wait for its pull-back. In our next article, we will follow up with an AMGN's stock valuation.