Amgen - Trading Around All-Time Highs As It Shifts Focus On Growth

| About: Amgen Inc. (AMGN)

Shares of Amgen (NASDAQ:AMGN) set fresh all time highs on Tuesday after the biotechnology company reported a solid set of third quarter results.

Amgen was furthermore upbeat about the integration with Onyx Pharmaceuticals (ONYX), acquired over the past summer.

As Amgen appears to focus on growth in the coming years, instead of returning capital to shareholders, I remain cautious. The significant momentum so far this year has pushed up the valuation quite a bit already.

Third Quarter Results

Amgen generated third quarter revenues of $4.75 billion, up 10.0% on the year before. Revenues came in ahead of analyst expectations of $4.58 billion, thanks to a large government order.

Adjusted net income rose by 13.0% to $1.48 billion, with adjusted earnings of $1.94 per share coming in ahead of expectations around $1.77 per share.

GAAP earnings were up by 23.6% to $1.37 billion, with earnings per share advancing by 27% to $1.79 per share. CEO and Chairman Robert Bradway commented on the performance,

We delivered excellent operating performance this quarter. We also delivered excellent strategic progress with the acquisition of Onyx Pharmaceuticals in oncology, the opening of our alliances in Japan and China, and the repurchase of our rights to NEUPOGEN and Neulasta in key emerging growth markets around the world.

Looking Into The Results

Actually Amgen saw quite some diversified revenue growth across its major drugs over the past quarter. Notably sales of NEUPOGEN rose by 50% to $466 million. This growth was almost entirely driven thanks to a $155 million order from the government.

Growth was also seen at XGEVA which reported a 41% increase to $439 million on market share gains, and Prolia which generated $178 million in revenues, which was up by 61%.

Only Aranesp reported a decline in revenues, as sales fell by 10% to $497 million.

Besides showing top line growth, Amgen managed to keep a tight control on costs. Cost of sales fell by 60 basis points to 15.4% of total revenues as selling, general and administrative expenses fell by 20 basis points to 26.2% of total sales. These margin gains were re-invested in the business by increasing research & development efforts. These costs rose by 60 basis points to 20.8% of total sales.

..And Forward

For the full year, Amgen now guides for revenues between $18.3 and $18.5 billion, as adjusted earnings are seen between $7.35 and $7.45 per share. Analysts were looking for earnings of $7.32 per share on revenues of $18.33 billion.

Note that Amgen previously guided for earnings of $7.30-$7.45 per share, on revenues of $17.8-$18.2 billion.

Valuation

Amgen ended its third quarter with $26.5 billion in cash and equivalents. Total debt stood at $27.2 billion for a modest net debt position of $0.7 billion.

Revenues for the first nine months of the year totaled $13.7 billion, up 6.4% on the year before. Net earnings rose by 14.1% to $4.1 billion in the meantime, with earnings totaling $5.31 per share.

Trading around $116 per share, the market values Amgen at $87 billion. This values the firm at 4.7 times annual revenues and 15-16 times adjusted earnings.

The quarterly dividend of $0.47 per share, provides investors with an annual dividend yield of 1.6%.

Some Historical Perspective

After nearly a decade of stagnation, investors in Amgen have finally seen some recent upside. Between 2004 and 2008, shares of Amgen have traded mostly in a $40-$80 trading range. Yet from lows around $50 in 2011, shares have steadily advanced to fresh all time highs around $116 per share.

Underlying these returns has been mostly the positive sentiment for the biotechnology sector in recent times and massive share repurchase programs.

Between 2009 and 2012, Amgen has increased its annual revenues by a cumulative 15% to $16.6 billion. Net earnings fell by some 5% to $4.3 billion. Note that earnings per share increased significantly as the company retired a quarter of its shares over this time frame.

Investment Thesis

After investors have seen years of stable operations, with a lack of real revenue or earnings growth, they are relieved to see Amgen growing again. This is being achieved though increased R&D investments and after announcing the nearly $10 billion acquisition to acquire Onyx.

This does mean however that Amgen didn't repurchase any shares over the past quarter. The company furthermore guides for no or a very low pace of repurchases into next year, or 2015.

Note that investors need a long time frame to see the accretion materialize. While Kyprolis could achieve annual sales of around $2-$5 billion according to some analysts by 2020, current quarterly sales of the flagship product were just $65 million, up 6% on a sequential basis.

Also note that the deal only closed some three weeks ago, on the 1th of October. The real potential of Kyprolis will only be realized until it can also treat earlier stages of myleoma therapy, with marketing approval seen just two year's down the road.

Other than this, the results were pretty much back in line with expectations indicating that Amgen is moving along just fine. It is just that investors have to shift their focus on growth in the coming years, after being used to large capital returns in recent years. Such a growth strategy, if successful, might be accompanied by higher earnings multiples.

Back in August of this year, when Amgen announced the acquisition of Onyx Pharmaceuticals, I last took a look at Amgen's prospects. I concluded that the deal was a calculated bet to restore a drug pipeline, by acquiring Onyx for a net consideration of $9.7 billion.

Onyx will add significantly to Amgen's oncology portfolio. Operating synergies and the worldwide sales efforts should maximize the potential of Kyprolis across the world. As such, Amgen appears to have a solid pipeline within the oncology space, one of the most fast growing items in the biotechnology area.

Shares have seen some 5% upside ever since, after shares were trading around $110 in August. I concluded that Amgen was willing to spend 12-13% of its current market capitalization to acquire a firm which could boost revenues by a quarter, if all goes well. Obviously there are many risks associated to such deals, yet a failure couldn't bankrupt the company.

I concluded to remain on the sidelines. The valuation is already high as Amgen needs quite some cash to rebalance the pipeline position. Note that recent earnings growth was entirely engineered through share repurchases and that 35% returns so far this year, made shares a bit too expensive to my taste.

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.