Amgen Should Start Paying a Dividend

Amgen thinks that it is a scrappy little biotech. They sure are a biotech company, maybe even a little scrappy, but definitely not little. In fact, their growth numbers look anemic (they need a shot of EPO :-). Amgen was a duopoly for fifteen years - during this period, they sold two drugs - Epoetin Alfa [aka EPO, Epogen, Procrit], and Neupogen [Filgrastim]. Keeping things simple, EPO helps the body build red blood cells and Neupo, white blood cells.

When Amgen had no drugs (in the early 1980's) they sold the rights for dialysis, diagnostics, non-human and overseas (except Japan, which went to Kirin), rights for EPO to Johnson & Johnson (JNJ), and attached an often disputed royalty clause based on EPO's sales. It was an agreement a tiny biotech had to sign in order to get their development efforts funded. Genentech (DNA) made a similar agreement with Roche in the 1980's - Roche still owns 56% of DNA; and Chiron (now part of Novartis) made a similar deal with Ciba-Sandoz. The reason for the disputes from my point of view, is that both companies grossly underestimated the amount of money EPO would bring in.

Amgen was smart - before the patent on EPO ran out, they added on a sialic acid group to EPO, and EPO+Sialic Acid (Darbopoetin) was christened NESP [Novel erythropoiesis stimulating protein]. Similarly, AMGN added a PEG group [polyethylene glycol, OK, it really is monomethoxypolyethylene glycol] to Neupo and called it Neulasta. Of course AMGN wanted more money for NESP and Neulasta - than for EPO and Neupo respectively. The first to balk was Britain's NHS. Canada followed, and even medicare started asking tough questions. Then JNJ claimed that NESP was a derivative of EPO and hence JNJ had rights to NESP too.

OK - so now, the reason I went through all of the above is to show that AMGN is now in the big-leagues. They now have nine drugs [the four compounds mentioned above plus Erbitux account for 90% plus of AMGN's sales]. While AMGN faces competition, there is no real generic threat.

Looking at AMGN's balance sheet, they are sitting on $9 Billion in cash - about a half of which is outside the USA - which if repatriated will cost the company dearly, so the company clearly states that if the $4.5 Billion were repatriated to the US, it would be taxes at AMGN's marginal tax rate [the highest], plus local taxes in the country from which the money is repatriated. The bottom-line is that the company cannot use this money directly to issue dividend checks (but there are ways around this).

AMGN repurchased 8.8M shares for $537M in the first three months of 2007 (they still have $6.8 Billion in repurchase authorizations). Until now, this has been AMGN's preferred way of returning cash to stockholders.

Given that that stock chart for the past five years looks like this, AMGN needs to start paying a dividend. This will also boost investor confidence in the fact that they will be around for a lot longer.

Disclosures: Long JNJ. No positions in AMGN, DNA, AVE, NVS, WYE.

Comments

[Steve Alexa...:]

I'm not sure anyone's too concerned about Amgen not being around for long... this is a 70 billion dollar company! But your point is well stated. Most pharma companies pay generous dividends, and Amgen can certainly afford it with nearly 5 billion dollars of free cash flow. With no generic biodrugs in the U.S. for the forseeable future, their legacy drugs will continue to bring in loads of cash.

Steve
magicdiligence.com

2008 Aug 07 10:37 AM

[amgendude:]

I agree and have been saying this for years. Erbitux is from ImClone, not AMGEN.

2008 Aug 07 11:51 AM