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In the race to find possible cures for many serious illnesses, Amgen (NASDAQ:AMGN) is one of the several companies that are engaged in the healthcare sector of the United States, focusing on the biotechnology industry. Amgen is credited as the world's largest independent biotechnology firm. In an industry where the medical breakthroughs are one of the major revenue streams for a company, the importance of the Research and Development cannot be overemphasized. Amgen has a history of developing drugs which were successful in establishing it in the market. Epogen and Neupogen are two examples of successful drugs developed by Amgen.

Revenue Profile

Amgen, as mentioned earlier, leverages its earnings based on the drugs it has developed over time. At present, Amgen extracts its revenue from six major drugs and other products which have smaller proportions in the revenue structure of Amgen.


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Source: Amgen Financial Statements

Overall, Amgen's sales have risen by 6% on the YoY basis. The greatest increase was in the sales of XGEVA, Prolia and Other products. Prolia and XGEVA (drugs which treat osteoporosis) were both approved by the FDA in June 2010 and November 2010 respectively. Therefore, these two drugs are relatively new in the market and we can expect their sales to grow in the coming years as Amgen tries to increase its market share for these drugs.


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Source: Amgen Financial Statements

The above graph takes a holistic view of Amgen's financial performance. The total sales in the United States have risen by 6% on YoY basis but the total sales to Rest-of-the-world (ROW) have risen by a hefty 8%. The net income and diluted EPS have both improved showing a positive outlook of the company.

In outlining its long-term strategy to the analysts and investors, Amgen's top management stressed that they wanted to increase the global footprint of the company in order to find new customers for its innovative products. The company especially wants to increase its manufacturing and commercial operations in China, Japan and the developing world. In order to serve its European customers, Amgen has developed its Irish facility to increase the availability of its vital medicines. The result of this approach is already evident in the recent 1Q13 financial statements of Amgen.


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Source: Amgen Financial Statements

The total sales of other products (which includes drugs apart from the six major ones that Amgen is producing) has witnessed a growth of 30% in markets throughout the Rest-of-the-world (ROW). This figure is double the growth witnessed in the United States.
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Source: Amgen Financial Statements

Furthermore, if we take the two most promising drugs of Amgen and analyze their sales, we see that XGEVA's sales had a growth of more than 100% throughout the Rest-of-the-world and Prolia's sales had a growth of 62% in markets that constitute the ROW bracket. After breaking up Amgen's sales and analyzing them, it becomes clear that the policy to expand its manufacturing and commercial operations in other countries will yield a long term positive effect on the company's financial performance.

Future Prospects for Amgen

In the latest quarter, Amgen's Research and Development spending as a percentage of product sales has grown by 19%. Amgen is close to getting its breakthrough melanoma therapeutic drug, T-Vec, approved by the FDA. In the experimental phase, the drug has improved survival rate by 21%. This is a promising result for a drug which, in the years to come, will have a lasting effect on Amgen's financials if it is approved by the FDA.

A worrying sign for Amgen is the not-so-far expiration of its patents for the drugs Neupogen and Neulasta. The patents will expire completely in the year 2015. After that the company is expecting to face severe competition from the low-cost producers in the United States. Fitch, in a report, addressed this fact and further added that Amgen should work towards increasing the sales of its promising drugs such as Prolia, XGEVA and Enbrel.

Relative Valuation

Amgen, as previously mentioned, is one of the many players in the biotechnology industry. The financial performance of its main competitors has massive effect on the valuation of Amgen's stocks. Some of the main competitors of Amgen are Gilead Sciences Inc (NASDAQ:GILD), Roche Holding (OTCQX:RHHBY) and Novo Nordisk (NYSE:NVO).

Source: Morningstar

The above table shows that Amgen's P/E ratio, P/B ratio and P/S ratio are all lower than its average calculated with its main competitors. This means that the Amgen's stock is possibly undervalued and can see an upward trend in the days to come.

Conclusion

With a history of developing blockbuster drugs, Amgen is continuing this tradition by increasingly spending on Research and Development activities. Its strategy of expanding into new markets is proving fruitful as the sales outside United States are skyrocketing. Initial testing suggests that some of Amgen's drugs in the later stages of development have a positive outlook. However, a worrying sign for the company is the forthcoming expiration of patents on two drugs which have immense financial importance to Amgen. The relative valuation of Amgen suggests the possible undervaluation of its stock. I would therefore give a buy stance to investors in the shorter horizon. This buy stance on a shorter horizon will change to a longer horizon if the company is able to get its late development stage drugs approved by the FDA.

Source: Amgen Inc. Is A Buy For Short Term Investors