While researching which big pharma/biotech company was the most attractive, I was surprised Amgen (NASDAQ:AMGN) rose to the top of the list in nearly every metric, where I put the most weighting. Amgen seems to take a back seat to many biotech companies in terms of media coverage and investor knowledge. However, Amgen has a number of catalysts on the horizon, a strong pipeline, impressive free cash flow, significant cash on hand, and amazing dividend growth.
For this article, I compared Amgen against Abbvie (ABBV), Biogen (BIIB), Bristol-Myers Squibb (BMY), Celgene (CELG), Gilead (GILD), GlaxoSmithKline (GSK), Merck (MRK), Novartis (NVS), and Pfizer (PFE). Most of these companies are similarly sized and established with large product lines. All comparisons won't be apples to apples every time, because each company is in its own growth stage and product cycle, but for the purposes of this article, each company provides a good comparison for potential Amgen investors.
Free Cash Flow
Whenever I research a stock, one of the first areas I look at is free cash flow. Free cash flow measures the ability to generate excess cash after all the bills have been paid. It's a good way to measure the financial health of a company, because it's what's left over to pay dividends, undertake share buybacks, acquire other companies, reinvest in the company, or stash cash away on the balance sheet.
($ millions) | Free Cash Flow Margin | FCF Yield | EV to FCF |
Amgen | 39.1% | 6.18% | 16.3 |
Abbvie | 14.7% | 3.02% | 35.1 |
Biogen | 27.4% | 2.74% | 35.7 |
Bristol-Myers Squibb | 21.7% | 3.36% | 29.4 |
Celgene | 34.3% | 2.58% | 36.7 |
Gilead | 49.1% | 7.18% | 12.8 |
GlaxoSmithKline | 14.9% | 4.89% | 24.3 |
Merck | 25.5% | 6.28% | 16.7 |
Novartis | 19.1% | 4.28% | 24.1 |
Pfizer | 31.5% | 7.06% | 14.1 |
Source: yCharts, Yahoo Finance, Investor Relation pages
Comparing Amgen to its peers, it's clear the company is somewhat of a cash cow. The company has the 2nd highest free cash flow margin (revenue divided by free cash flow), 4th highest free cash flow yield and the third lowest enterprise value to free cash flow ratio. There are dozens of free cash flow metrics investors can use when evaluating a company, but these are my 3 favorite. FCF margin shows the cash a company is able to generate for every $1 of revenue. In this case, Amgen has a substantial FCF margin of 39.1%. Free cash flow yield takes FCF per share and divides by the current market price per share. In general, anything above 5% is impressive, so Amgen hits the mark here as well with a 6.18% yield. EV to FCF takes into account the company's debt load, so it gives investors an idea right off the bat if a company is hiding significant debt on their balance sheet. In this case, Amgen has the 3rd lowest ratio in the peer group, which shows it produces its free cash flow without being bogged down by debt.
In 2014, Amgen increased free cash flow by 39% year-over-year to $7.8 billion. This allowed the company to increase dividends by 30% in 2014, increased cash and marketable securities on the balance sheet by $4.2 billion to $27 billion and pay down long-term debt by $1.4 billion. After paying out $1.9 billion in dividends and $200 million in share buybacks, the company was then able to improve net debt by $5.6 billion during the year. In a nutshell, this is exactly why free cash flow is so important to the overall health of a company.
Dividend Growth
($ millions) | 3 Year Quarterly Div. CAGR | Dividend Yield | Payout Ratio |
Amgen | 41.3% | 2.0% | 33.8% |
Bristol-Myers Squibb | 3.9% | 2.4% | 89.7% |
GlaxoSmithKline | 6.2% | 5.5% | 91.2% |
Merck | 5.8% | 3.1% | 52.8% |
Novartis | 5.5% | 2.8% | 53.0% |
Pfizer | 11.9% | 3.2% | 54.1% |
Source: Dividend.com
While Amgen's free cash flow is impressive and stacks up well against its peers, the company blows its peers out of the water in dividend growth over the past 3 years. Since the company started paying dividends in 2011, the quarterly dividend has a 3 year CAGR of 41.3%. Starting at $0.28/quarter in 2011, the company has raised the quarterly dividend 4 times to its current payment of $0.79/quarter. These 4 dividend increases have ranged from 28.5% to 30.5%. While the dividend yield lags its peers, the company has the lowest payout ratio in the industry and has the ability to continue increasing its dividend by double-digits. As a percentage of FCF, the dividend only accounts for 24.3%.
Management has stated they intend to return 60% of adjusted net income to shareholders going forward. This means investors will benefit from continued dividend increases and share buybacks. The 30% dividend increase in 2015 has been followed up with the announcement of expedited share buybacks, which management expects to come in around $2 billion in 2015. $2.4 billion in dividends paid in 2015 and $2 billion through share buybacks will total $4.4 billion returned to shareholders in 2015. If management does hit the 60% adjusted net income target, the adjusted net income for 2015 will hit $7.33 billion, an increase of 9.5% over 2014.
Balance Sheet
($ billions) | Market Cap | Cash and Marketable securities | % Cash per share | Long-term Debt | Net Debt |
Amgen | $ 119.7 | $ 27.0 | 22.6% | $ 30.7 | $ (3.7) |
Abbvie | $ 96.4 | $ 8.4 | 8.7% | $ 15.0 | $ (6.6) |
Biogen | $ 96.3 | $ 1.8 | 1.9% | $ 0.6 | $ 1.2 |
Bristol-Myers Squibb | $ 101.3 | $ 7.4 | 7.3% | $ 7.8 | $ (0.4) |
Celgene | $ 96.7 | $ 7.5 | 7.8% | $ 6.9 | $ 0.6 |
Gilead | $ 154.2 | $ 10.1 | 6.5% | $ 12.4 | $ (2.3) |
GlaxoSmithKline | $ 115.3 | $ 6.8 | 5.9% | $ 28.9 | $ (22.1) |
Merck | $ 169.0 | $ 14.3 | 8.5% | $ 27.8 | $ (13.5) |
Novartis | $ 245.6 | $ 13.5 | 5.5% | $ 20.4 | $ (6.9) |
Pfizer | $ 216.0 | $ 33.5 | 15.5% | $ 37.1 | $ (3.6) |
Source: Yahoo Finance (as of Dec. 31, 2014)
What really stuck out for me in this comparison, is Amgen's huge cash hoard. I knew Pfizer was sitting large stacks of cash, but I was unaware Amgen had $27 billion stashed away. On a cash per share basis, Amgen has 22.6% of its market capitalization held in cash. This gives the company tremendous flexibility to target other biotech companies, similar to what Pfizer did with Hospira (HSP), protect its dividend increases or pay down its substantial debt. Amgen's balance sheet also presents its first risk. Free cash flow and dividend growth are great, but an ugly balance sheet can effectively wipe out other company positives. Luckily, Amgen's huge cash balance nearly wipes out its equally large debt load. Amgen has $30.7 billion in debt, which is the 2nd largest in this comparison, but when you look at net debt, the company falls right in the middle with net debt of $3.7 billion. Because Amgen has such a large free cash flow, this debt load is easily manageable and doesn't present a significant risk for investors. In 2014 alone, the company was able to improve net debt by $5.6 billion. As long as Amgen doesn't have any significant acquisitions in 2015, Amgen will turn the corner on the balance sheet and have positive net debt by the end of the year.
Amgen Analysis
Amgen saw 2014 revenue increase 7.4% year-over-year to $20.06 billion, net income increased 1.5% to $5.15 billion, and free cash flow increased 40% to $7.8 billion. For 2015, the company expects revenue between $20.8 - $21.3 billion, an increase of 3.7% to 6.7%, and GAAP diluted EPS between $7.48 - $7.87, an increase of 11%-17%. Amgen is in the midst of a cost savings initiative aimed at increasing operating margins to 52%-54% by 2018. Through workforce reductions and sales force optimizations, Amgen saved $300 million in 2014 and improved adjusted operating margins from 37.3% in 2013 to 42.2% in 2014. The company expects this savings to increase to $400 million in 2015 and 2018 operating expenses to be at least $800 million lower versus 2013. This improved operating margin flows directly to the bottom line and is a big reason for the vast improvements in free cash flow.
Improved profitability on the company's biggest drug, Enbrel, which accounts for roughly 25% of total revenue, also helped the company in 2014 and will continue doing so in 2015. During 2014, Amgen delivered over $800 million in earnings growth from Enbrel. On October 31, 2014, the company passed the one-year anniversary of the first step-down in Enbrel related royalty payments, which saw expenses decline approximately $100 million in the fourth quarter and roughly $250 million per quarter for the first 3 quarters of 2014. This is a significant step because Amgen was able to extend Enbrel's patent expiration in 2011 for another 17 years, which means it likely won't face competition from biosimilars until 2028. With annual sales over $4 billion, Amgen can continue to drive strong profitability with Enbrel for years to come.
2015 will also be a product launch cycle for the company. During the year, the company expects to launch several new drugs/application (Neulasta on-body injection system, Repatha, Corlanor, and BLINCYTO). Because my direct knowledge in biotech specifics is limited, I'll refer readers to a much more knowledgeable source on this topic and a Seeking Alpha author that I regularly follow for biotech/big pharma information. Alexander J. Poulos has a great article on Amgen's upcoming product launch cycle in 2015 that readers should take a minute to review.
In total Amgen has 12 new drugs in Phase 3 trials, 11 in Phase 2 and 16 in Phase 1. In addition, the company expects to launch at least 5 biosimiliars from 2017-2019, including a biosimilar for one of the best selling drugs in the world, Humira. Amgen also has 11 drugs currently producing over $100 million in quarterly revenue, so the company doesn't need to rely on 1 key drug to drive sales.
Conclusion
For investors with at least a 5 year timeframe, Amgen is a strong buy at current levels around $155-$160 per share. On all key metrics, Amgen stacks up well against leaders in the industry. The company has impressive and improving margins, strong free cash flow, industry leading dividend growth over the past 3 years, one of the largest cash balances in the industry, as well as an impressive drug pipeline, which should begin to reward shareholders as soon as this year. Amgen doesn't seems to get the media coverage of Gilead, Biogen, or Celgene, but I'd argue Amgen is a more attractive investment at current levels. The company has enough catalysts to maintain future growth as well as the fundamentals to provide decent downside risk. Amgen won't be an exciting stock with homerun potential, like Celgene or Gilead, but it should bring steady revenue and dividend growth with improving margins over the next several years.
