Although shares of Amgen (AMGN) are up over 30% this past year, many analysts and investors continue to underestimate Amgen's potential. These analysts and investors are so enthralled by the immediate growth opportunities presented by companies like Gilead (GILD), Celgene (CELG), and Biogen (BIIB) that they completely disregard the not-so-distant growth opportunities of companies like Amgen. In my opinion, Amgen occupies one of the most favorable positions in the biotech world, and is selling at a very attractive price to boot. With over $22 billion in cash on hand, a competent and motivated management team, and the ability to generate over $5 billion of free cash flow each year, Amgen is truly a force to contend with in the coming years. Amgen shares trade at just 14 times the average 2014 earnings estimate of $8.15 per share, which equates to an earnings yield (E/P) of just over 7%. Due to the market's continued disrespect for Amgen (even after my previous article on the stock last May), I have decided that it is time for me to once again lay a bullish case for the company, but this time in a bit more detail.
The main criticism I hear from analysts is that Amgen will not be able to meaningfully grow revenue and earnings because of upcoming patent expirations and increased competition. To counter these criticisms, I plan to write a series of articles, starting with this article, discussing how Amgen can, and likely will, achieve meaningfully growth in revenue and earnings, despite these very real challenges. My bullish attitude toward the stock is based on the premise that the Amgen has five significant sources of revenue and earnings growth to draw on over the next decade:
Growth from currently marketed products
Growth from acquired products (both recent and future acquisitions)
Growth from current and future pipeline products
Growth from manufacturing and marketing biosimilars
Growth from international expansion efforts (e.g., Japan, China, India, and the Middle East)
This article ("Don't Underestimate Amgen: Part I") will explore the first and second sources of growth -- that is, (1) growth from currently marketed products and (2) growth from acquired products. Subsequent articles will explore the third, fourth, and fifth sources of growth. I will conclude the series by summarizing my arguments and explaining why I believe Amgen is a good investment at current price levels -- of course, if the stock price shoots up in the meantime I will simply brag about being right!
With that, let's get started...
1. Growth from Currently Marketed Products (excluding Onyx-acquired products)
Amgen currently markets ten major products (not including those acquired through the recent Onyx acquisition). Sales for these products from 2004 through 2012 are shown in the table and graph below.
During Amgen's Q3 2013 conference call, management provided 2013 revenue guidance of between $18.3 and $18.5 billion (which I estimate includes about $150 million from Q4 2013 Onyx-related products as well as $400 million in non-product revenue).
A. The Fab Five - Neulasta, Neupogen, Enbrel, Aranesp, and Epogen
The first thing you probably noticed from the above graph is that Amgen generates the bulk of its revenue from five key products: (1 & 2) Neulasta and Neupogen, (3) Enbrel, and (4 & 5) Aranesp and Epogen. In 2012, the Fab Five generated over $13.5 billion in sales, or more than 80% of Amgen's total product revenue. To give the reader some context and perspective, below is a brief description of each of these five products including historic sales trends:
Neulasta and Neupogen. Neulasta and Neupogen both stimulate production of a type of white blood cell important in the body's fight against infection. These two products, for example, can be given to cancer patients to replenish white blood cells that may have been killed along with cancer cells through chemotherapy. Neupogen was launched in the United States and Europe in 1991 while Neulasta was launched in the same markets in 2002. In October 2013, Amgen announced that it acquired rights from Roche to market Neulasta and Neupogen in 100 additional markets worldwide, thereby demonstrating management's confidence in the longevity of these two products. Of the two products, Neulasta is the more popular choice because it is longer lasting and requires less frequent dosing. Neulasta sales have grown every year since its launch in 2002, reaching $4.1 billion in 2012. Neupogen sales have more or less hovered around $1.2 billion per year for over a decade, but that may soon change because a key Neupogen patent will expire at the end of this year and companies like Teva Pharmaceuticals (TEVA) are expected to introduce competing products. Nevertheless, for the reasons stated in the paragraph "D" below, I don't think competition from biosimilars will devastate Neupogen sales.
Enbrel. Enbrel is a fusion protein that inhibits the binding of TNF to TNF receptors thereby significantly reducing inflammatory activity. Among other things, Enbrel is indicated for the treatment of adult patients with moderate to severe active rheumatoid arthritis; active psoriatic arthritis, and active ankylosing spondylitis. Enbrel was launched in the United States in 1998 and in Canada in 2001. Amgen markets Enbrel under a collaboration agreement with Pfizer. Amgen has the right to market and sell Enbrel in the United States and Canada while Pfizer maintains the right to market and sell Enbrel outside the United States and Canada. Pfizer is also entitled to a share of Amgen's sales. The collaboration agreement with Pfizer expired on October 31, 2013 and will result in a significant windfall for Amgen in 2014 (approximately $800 million addition to operating income) and increased profitability beyond. In 2012, Enbrel sales amounted to $4.2 billion. Despite its old age, Enbrel sales have grown every year since 2005 (with the exception of 2009) and have grown by 9% so far this year. Enbrel is covered by multiple patents in the United States and the earliest does not expire until August 2019.
Aranesp and Epogen. Aranesp and Epogen are both proteins that stimulate red blood cell production. These two products are given to patients who suffer from a deficient blood cell count that can lead to anemia -- a condition in which insufficient oxygen is delivered to the body's organs and tissues. Epogen is the older of the two products. It was launched in 1989 and is indicated primarily for the treatment of anemia associated with chronic kidney disease in patients on dialysis. Aranesp was launched in 2001 in the United States and Europe and is indicated for the treatment of anemia associated with chronic kidney disease (in both patients on and off dialysis) as well as the treatment of anemia resulting from chemotherapy. Epogen sales were relatively stable at around $2.5 billion per year from 2004 until 2010, but have declined since then to about $1.9 billion in 2012. Aranesp sales peaked at $4.1 billion in 2006 and have been on the decline ever since, arriving at $2.0 billion in 2012.
While it is true that sales of Aranesp and Epogen are past their prime, their sales declines have been (and will likely continue to be) neutralized by sales growth in Neulasta and Enbrel. For example, as the chart below indicates, combined sales of Aranesp and Epogen declined a total of $362 million in 2012 while combined sales of Neulasta and Enbrel increased a whopping $675 million!
In fact, in 2012, the sales increase resulting from Enbrel alone ($535 million) was more than enough to offset the sales decrease resulting from Aranesp and Epogen combined ($362 million). Furthermore, so far this year, the rate of decline in Aranesp and Epogen appears to be slowing somewhat -- down 7% and 2%, respectively, in the first 9 months of 2013 compared to down 11% and 5%, respectively, in 2012. I would expect this slowing trend to continue -- at least for Epogen -- since a key competitor for Epogen was taken off the market earlier this year. And, as far as Enbrel goes, I should mention that Amgen's management plans to invest heavily in the marketing of this drug to prolong its growth and dominance in the market.
B. The Dynamic Duo - Prolia & XGEVA
Sales of Amgen's Prolia and XGEVA have grown rapidly since their launch in 2010. These products contain the same active ingredient but are approved for different indications, patient populations, doses, and frequencies of administration. XGEVA, for instance, is approved for the prevention of bone fractures in patients with bone metastases from solid tumors. Prolia, on the other hand, is approved for the treatment of postmenopausal women with osteoporosis that are at high risk for fractures.
In 2012, Prolia and XGEVA's combined sales reached 1.2 billion, up 120% from the year prior. Moreover, after only nine months this year, sales of Prolia and XGEVA have already surpassed the $1.2 billion mark and are up 46% year over year. In nominal dollar terms, Prolia and XGEVA added $666 million to Amgen's overall product sales in 2012 and $390 million during the first nine months of 2013. Forget Neulasta and Enbrel! As seen in the chart below, Prolia and XGEVA sales are sufficient themselves to stem the tide and fill the gap created by declining Aranesp and Epogen sales, at least in the near to medium term. In fact, analysts like Morningstar's Karen Andersen estimate that Prolia/XGEVA sales will peak around $3 billion annually -- this means we are not even halfway to peak sales potential!
C. The Three Musketeers - Sensipar/Mimpara, Vectibix, Nplate
Sensipar/Mimpara, Vectibix, and Nplate racked up $1.68 billion in sales for Amgen in 2012, or approximately 10% of overall sales. While none of these products are star players on their own, together they are important and consistent bench players. Sensipar/Mimpara is a small molecule drug approved in 2004 to treat chronic kidney disease patients on dialysis. Vectibix is a monoclonal antibody approved in 2006 to treat patients with EGFr expressing metastatic colorectal cancer after disease progression on or following other drugs. Nplate is a drug licensed to Amgen and approved in 2008 to treat patients with chronic immune thrombocytopenic purpura, a bleeding disorder where the patient's immune system attacks and destroys his/her own platelets.
Sales of Sensipar/Mimpara, Vectibix, and Nplate grew in the double digits in 2010, 2011, and 2012. In the first 9 months of this year, sales of Sensipar/Mimpara, Vectibix, and Nplate have grown 13%, 7%, and 15%, respectively. In 2012, these three products added $250 million to Amgen's overall product sales -- enough to offset a large portion of the decline in Aranesp and Epogen sales. In fact, so far in 2013 (the first 9 months), these three products have increased Amgen's sales from the year prior by $147 million while Aranesp and Epogen have reduced sales by $144 million -- an almost a perfect offset! Thus, in the short run, I would argue that declines in Aranesp and Epogen will be almost completely offset by these three products alone, and that any sales of Prolia/XGEVA and any sales growth in Neulasta/Enbrel are simply icing on the cake.
D. Competing Products - Annoying, Not Devastating
Generic manufacturers and other competitors will have a hard time knocking off Amgen's biologic products even after the loss of patent protection. For instance, at the 2013 Credit Suisse Healthcare Conference, Amgen's CFO, Jon Peacock, stated that biosimilars in Europe have typically resulted in a loss to the original manufacturer of 30-40% market share and 10% price erosion. I think we can expect the same or smaller level of market share loss and price erosion in the United States with respect to Neupogen in the wake of its recent patent expiration. Thus, while investors market share losses and price erosion is never a good thing, the good news is that biosimilar competition is not likely to cause Neupogen sales to fall to zero.
But why should we expect only limited market share losses and price erosion? Well, for starters, biologic drugs, like Neupogen, are much harder for generic manufacturers to replicate than small-molecule drugs, as discussed in this recent article. It is very difficult and expensive for a generic manufacturer to produce an identical copy of biologic drug due to the complex manufacturing process that is involved (and the manufacturing process itself may be protected by patent). This difficulty in producing identical and interchangeable biologic drugs is the reason competing biologics are called "biosimilars" as opposed to "generics." These competing drugs are not identical copies of the original -- they have slight differences. As such, regulators require extensive trials before a biosimilar can be marketed to the public to ensure safety and efficacy. All of these factors create a bit of a moat for biologic drugs like Neupogen. In fact, Amgen has an ongoing "Manufacturing Matters" marketing campaign. Amgen even has a website on biologics called buildingbiologics.com where you can view a video addressing "The Challenges in Manufacturing Biologics" (see the bottom left-hand corner of the home page). With this understanding in mind, if you were a physician, would you prescribe the tried and trusted over the 10% cheaper biosimilar? Probably not. Doing so may result in an expensive lawsuit if something goes wrong.
Below is a table showing my estimate of sales from Amgen's currently marketed products from 2014 through 2023 (i.e., the next 10 years). The numbers in red indicate the year of the products first patent expiration. Neupogen and Epogen lost patent protection in 2013. You'll notice that I have assumed sales will decrease after patent expiration. I have calculated that Amgen will experience 40% market share loss and 10% price erosion over the four-year period after patent expiration. You'll also notice from the table that I expect sales from currently marketed products to hold up fairly well through 2017, but dropping more quickly from 2018 onward.
2. Growth From Acquired Products - The Onyx Acquisition
Everyone who follows Amgen knows that it recently acquired Onyx Pharmaceuticals for $125 per share, or $9.7 billion net of cash. So, what did Amgen purchase in this deal? Well, for starters, Onyx currently has three revenue generating products: Kyprolis, Nexavar, Stivarga. But, of course, the real focus of the acquisition was Kyprolis since the multiple myeloma market is expected to double from $6.1 billion in 2012 to $11.5 billion by 2018 as illustrated by the chart below (part of a presentation given at the 2013 Credit Suisse Healthcare Conference).
Analysts estimate that Kyprolis could reach annual sales of between $2.0 billion and $3.0 billion in the next eight to ten years (Morningstar estimates Kyprolis sales could reach $2.5 billion by 2022). Kyprolis is a proteasome inhibitor and is currently indicated for use in relapsed/refractory multiple myeloma patients -- the smallest portion of the multiple myeloma market. The hope, however, is that current Phase 3 studies will open up a much larger door for Kyprolis's use in the much larger markets of first and second line therapy.
Amgen also picked up a couple other solid assets as well as several pipeline products through the Onyx acquisition. For instance, Onyx has global profit share rights (ex Japan) with Bayer for Nexavar, which is approved for the treatment of patients with liver cancer and, most recently, thyroid cancer. Nexavar could see further label expansion as it is currently in Phase 3 trials for the treatment of breast cancer. In addition to revenue from Kyprolis and Nexavar, Amgen will also receive revenue from Stivarga. Onyx receives a 20% royalty from Bayer on all global sales of Stivarga. Stivarga is indicated for the treatment of some patients with metastatic colorectal cancer and could see further label expansion after Phase 3 trials are completed for second-line treatment (after Nexavar) in liver cancer patients.
Onyx's pipeline includes Oprozomib (in Phase 1b), Palbociclib (in Phase 3), and ONX 0914 (in preclinical trials). Oprozomib is perhaps the most important product in Onyx's pipeline from a financial standpoint. Oprozomib is in Phase 1b trials and is being evaluated for the treatment of multiple myeloma as well as recurrent or refractory solid tumors. But interestingly, just like the films Terminator 2 and The Dark Knight, Oprozomib could ultimately prove to be a more successful and lucrative sequel than its original progenitor. This is due to Oprozomib's convenience as an oral drug as opposed to an injectable one like Kyprolis.
Palbociclib is in Phase 3 trials and is being evaluated for the treatment of patients with advanced breast cancer. Palbociclib is really a Pfizer compound, but Onyx will receive an 8% royalty on any future net sales worldwide. ONX 0914 is an immunoproteasome inhibitor and is being evaluated for potential treatment of autoimmune disorders such as rheumatoid arthritis, inflammatory bowel disease, and lupus.
Below is my estimate of Amgen's portion of Kyprolis, Nexavar, and Stivarga sales from 2014 through 2018:
I conservatively estimated that Amgen's portion of Nexavar sales and Stivarga sales will grow 5% and 10% per year, respectively, arriving at $379 million and $63 million at the end of 2018. In the grand scheme of things, these two products won't make much difference to Amgen's top line, but they are still nice to have them in the back pocket. But, as previously mentioned, the important player is Kyprolis. My estimate for Kyprolis sales in 2018 is based on the assumption that Kyprolis sales will reach $2.5 billion by the end of 2022. Given that the multiple myeloma market is expected to be an $11.5 billion market by 2018, I don't believe my estimate of $1.39 billion by that time is too farfetched. My 2018 estimate of $1.39 billion would only amount to 12% of the $11.5 billion expected market at that time.
Additionally, if Kyprolis ultimately proves to be more effective than Celgene's Revlimid, Kyprolis sales could be much higher than the $2.5 billion number presented by analysts. Revlimid sales, for instance, are expected to reach $6.2 billion this year. Of course, there is always a risk that Kyprolis will never reach such heights. A Bank of America Merrill Lynch analyst, for example, recently issued a note stating that Celgene management had cited reports of cardiovascular events associated with Kyprolis treatment. This caused concern that Kyprolis may never be approved for first or second line therapy. However, Amgen promptly issued a statement pointing out that the independent Data Monitoring Committees (DMCs), to date, "have not reported any specific safety concerns and have recommended continuing the Phase 3 studies." It is likely that the safety concerns posed by the BofA analyst are overblown and taken out of context, but I will certainly revise my Kyprolis estimates if we get concrete evidence that something has changed.
The one thing I believe many analysts forget, however, is that Amgen has the financial wherewithal to make other accretive acquisitions over the next few years in order to fuel further revenue and earnings growth. After all, Amgen has over $22 billion in cash and its management has proven that it is disciplined enough to walk away if the price is too high (recall that Amgen management refused to go much higher than its original $120 per share offer for Onyx). I mentioned this fact in my previous article when I stated that "Amgen could do similar acquisitions [referring to Gilead's Pharmasset acquisition] if it needed to acquire a promising drug to improve its pipeline."
The table below combines my estimate of sales from currently marketed products with my estimate of sales from Onyx-acquired products.
As you can see, I expect Amgen will be able to generate sales growth in 2014 and 2015 from these two sources alone (for your reference, total product sales for 2013 will probably come in around $18 billion). You can also see that, without even considering potential revenue from Amgen's current and future pipeline as well as revenue from future acquisitions and international expansion, I anticipate Amgen will be able to maintain approximately $19 billion in product sales through 2017. Moreover, you can see that, in about a decade from now, in the year 2023, I believe Amgen will still be able to squeeze $12 billion dollars out of these current products.
To recap, the intent of this article was to make the following points:
Near-term revenue growth in currently marketed products (not including acquired products or pipeline products) is more than enough to offset near-term sales declines of Aranesp and Epogen.
Annual revenue from products acquired from Onyx could amount to nearly $1 billion by the end of 2015, $1.8 billion by the end of 2018, and$ 2.8 billion by the end of 2023 (this does not include Onyx pipeline products)
Amgen can and likely will acquire additional growth assets in the future with its cash balance of over $22 billion.
Amgen can grow revenue through 2015 and maintain revenue through 2017 from current products alone without any additional contribution from its current and future pipeline, future acquisitions, and international expansion efforts.
My next article will explore Amgen's potential for revenue and earnings growth from its current pipeline, which, by the way, is one of the most underappreciated pipelines on Wall Street. Until then, please feel free to comment.