Is It The Right Time To Enter Amgen?

Sep.18.13 | About: Amgen Inc. (AMGN)

Amgen (AMGN) is facing patent expiry risk for its leading products Neupogen and Neulasta, which are due to expire in 2015. These drugs contributed more than 30% of its revenue in the first half of 2013. In order to mitigate this risk, Amgen announced the acquisition of Onyx Pharmaceuticals (ONXX), a leading pharma company known for its oncology drugs. Onyx's Kyprolis is a blockbuster drug and Amgen is counting on its potential to generate returns.

Onyx, a strategic move

On Aug. 25, 2013, Amgen announced the acquisition of Onyx Pharmaceuticals for $10.4 billion in cash. Amgen is planning to fund this deal with a $8.1 billion bank loan at an interest rate of 3-month LIBOR plus 1.04% for a 5-year term and the rest with cash available. This deal is strategically significant for Amgen as it strengthens the company's oncology base.

Kyprolis, Onyx's flagship drug, is currently marketed for the treatment of patients with multiple myeloma in the U.S. Multiple myeloma is a blood cancer occurring in white blood cells. The drug is prescribed to those patients who have already received at least two prior therapies and are still showing disease progression. Onyx received FDA approval for Kyprolis in July 2012.

Kyprolis has huge growth potential; and there are currently 750,000 people suffering from multiple myeloma worldwide. According to Amgen, the market for multiple myeloma is expected to grow from $6.1 billion in 2012 to $10.4 billion by 2017, creating a huge opportunity for the drug. Kyprolis is the most preferred drug for third stage multiple myeloma treatment with 52% market share. The drug generated net sales of $64 million for Onyx in 2012, and it has already contributed revenue of $125 million in the first half of fiscal year 2013. Looking at the momentum, we expect the drug to generate revenue of more than $240 million in 2013, benefiting Amgen.

What else comes with the deal?

The deal brings with it a pool of other oncology assets. Currently Onyx has two products in collaboration with Bayer -- Nexavar for kidney/liver cancer and Stivarga for intestinal and rectum cancer. Onyx generated revenue of $288 million from its collaborative agreements and $8.29 million from royalty on Stivarga for digestive system cancer in 2012. Onyx is also developing a breast cancer drug Palbocicib with Pfizer (PFE), which is currently in phase III trials. Onyx will receive a royalty of 8% on Palbocicib's global net sales. We expect this acquisition will contribute primarily in revenue growth for Amgen.

Maturing drugs, convincing pipeline

Amgen's patents for its top selling drugs Neupogen and Neulasta will expire in 2015. In fiscal year 2012, the company made revenue of $5.35 billion from these drugs. However, the company has strong pipeline; it has fourteen drugs in phase three trials and is working hard on developing new therapies to treat serious illness, and the results are mixed. Recently Amgen and Cytokinetics (CYTK) announced disappointing phase two trials results for Omecamtiv Mecarbil for the treatment of heart failure. Omecamtiv Mecarbil didn't achieve its primary efficacy endpoint in reducing dyspnoea, breathing difficulty due to shortness of breath, in patients with acute heart failure problems. Cytokinetics is continuing the research. Currently there are about 5.1 million people with heart failure risk, creating a huge market for the drug, if successfully developed.

Currently Amgen's blockbuster drugs Neupogen and Neulasta are doing great in market place, they generated $2.78 billion in the first half of fiscal year 2013. Aranesp and Epogen, Amgen's leading oncology drugs, sales have been declining, but the addition of Onyx will certainly strengthen the company's oncology base. In all, Amgen generated revenue of $8.74 billion in the first half of 2013.

A glance at numbers

Currently Amgen has a five-year PEG ratio of 1.75, giving an EPS growth potential of 10.9% over the next five years. If we look at the forward PE of 14.06 as compared to trailing PE of 19.12, we get an EPS growth of 35% for the next twelve months. Amgen has consistently provided dividends to its shareholders and has shown a growing trend, which makes it a good investment for income investors. In the last three years, the company increased its quarterly dividend by 67.85% from $0.28 to $0.47.

Conclusion

The latest acquisition is a strategic move by Amgen's management. The deal is expected to become cash accretive in 2015; the same year Amgen's patents for its blockbuster drugs are expiring. This acquisition will surely mitigate the risk to Amgen's cash flow. Looking at the International Myeloma Foundation estimate, Kyprolis is surely a blockbuster drug. The company's strong pipeline also brightens the outlook for some strong drugs to reach the marketplace in the coming future. We see Amgen as a promising investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.