How Safe Is Amgen's Dividend?

 |  About: Amgen Inc. (AMGN)
by: Peter Geschek

Plenty of good news

Amgen (NASDAQ:AMGN) on October 10, 2012, declared a $0.36 per share dividend for the fourth quarter of 2012. The dividend will be paid on December 7, 2012, to all stockholders of record as of the close of business on November 15, 2012.

Amgen started paying quarterly dividends of 28 cents per share in 2011 (the first payment made in August) and 36 cents per share in each quarter of 2012.

There is plenty of good news about Amgen these days besides dividends.

Recently Amgen's shares have been trading at a record high. Shareholders appear to be rewarding the company for its $10 billion share buyback program initiated in 2011.

In the third quarter Amgen delivered strong free cash flow (operating cash flow less capital expenditures) of $1.6 billion compared to $900 million a year ago. This was driven by a combination of higher operating profits compared with 2011, and, to a lesser extent, by the timing of cash tax payments.

Cash was used in the third quarter primarily to repurchase company shares, pay dividends, and acquire KAI Pharma for $300 million.

During this quarter, Amgen spent $800 million to repurchase 10 million shares. Since the announcement of the $10 billion share repurchase program in 2011, the company has repurchased 131 million shares total, at a cost of $8.4 billion and for an average cost of $64.19 per share.

Amgen also raised $2 billion in the bond market in the third quarter to pay off the $2.5 billion convertible bond, which matures in February of 2013.

Sales of the bone drug Xgeva, approved in November 2010 by the FDA to reduce fractures in cancer patients, and Prolia, designed for the treatment of osteoporosis in menopausal women, generated $311 million in the third quarter.

Sales of Enbrel, a drug that treats rheumatoid arthritis, increased 17 percent to $1.08 billion. Amgen's Neulasta and Neupogen, which reduce the risk of infection in patients on chemotherapy, increased 1.5 percent to $1.36 billion.

Amgen's 36 percent gain this year bests the Standard & Poor's 500 Health Care Index's ((S5HLTH)) 15 percent increase, and Amgen's shares are trading at their highest level since 1984. The stock may end the year with the company's best annual gain since 1999.


Yet the company is facing numerous challenges from many directions: newly approved competitive drugs, regulatory issues and the expiration of patents on some key assets.

Over the years, Amgen has successfully defended its monopoly as a drug supplier for dialysis patients in patent lawsuits against the Genetics Institute, Transkaryotic Therapies, and Roche.

Amgen's sales of the anemia drug Aranesp fell 17 percent to $497 million in the third quarter. Worldwide Aranesp sales for the years ended December 31, 2011, 2010 and 2009, were $2.3 billion, $2.5 billion and $2.7 billion.

Epogen, an older version and Amgen's main drug for dialysis, rose 3 percent to $491 million, but year-over-year sales in the U.S. for the years ended December 31, 2011, 2010 and 2009, were $2.0 billion, $2.5 billion and $2.6 billion. Epogen is not marketed in Europe.

Amgen has notified its Longmont, Colorado, employees that it will cease manufacturing Epogen, which is made in bulk form at the Longmont facility, in 12 to 15 months.

Affymax (AFFY)

In March 2012 the FDA approved an alternative to Amgen's drugs for use in increasing red blood cell levels in anemic patients receiving kidney dialysis.

The new drug Omontys, developed by a small company Affymax, in partnership with the Japanese company Takeda, has the clear advantage of convenience: it is taken only once a month instead of several times a week, as is the case with Epogen.

After approval Affymax quickly got to work. In a month Omontys was made available to distributors.

By July the company got a specific Medicare code to speed up reimbursement. Shortly after, the training of an 80-strong sales team was completed and the salespeople were sent into the field with the task of selling the drug to nephrologists and supporting staff employed at dialysis organizations.

A deal was struck with Fresenius Medical Care North America (FNS), the largest dialysis provider in the U.S., which runs approximately 2,000 dialysis centers in the U.S. and collectively treats over 150,000 patients a year. The company agreed to use the product in just 100 centers, with plans to expand following initial evaluation. By the end of September Fresenius had about 10,000 patients on Omontys.

A contract was also signed with U.S. Renal Care, another dialysis chain. Further agreements were reached with several medium and small dialysis organizations.

The sales force is now fully deployed, and according to the company, is making progress with other medium-size dialysis organizations across the nation.

Affymax is a stock market high-flyer this year: investors seem confident the small company will successfully go on to expand into the giant's domain.

Another competitor, Roche's Mircera, will be allowed to sell in the U.S. starting in 2014 under a limited license.

Mircera, like Omontys, is a long-term use drug, and has been selling successfully in Europe and elsewhere (2011 sales: 344 million Swiss francs). Mircera patients can inject themselves after some training.

Foreseeing all this, Amgen has taken some precautions. Before Omontys was approved, Amgen made sure to lock Affymax out of the market as best it could by signing contracts with the two biggest dialysis chains in the U.S. These two chains together treat around two-thirds of the nation's roughly 400,000 dialysis patients.

Presumably in exchange for big discounts from Amgen, one of the chains, DaVita (NYSE:DVA), agreed to use Amgen's drugs for at least 90 percent of its needs for seven years. Fresenius, the other big chain, signed a three-year non-exclusive deal.

Regulatory changes

In 2011 Medicare began paying a set fee to cover a complete dialysis treatment, including drugs, supplies, and non-routine laboratory tests that were previously reimbursed separately. So Epogen has now become a cost that lowers profit, giving clinics an incentive to use as little of the drug as possible.

The FDA meanwhile has increased restrictions on the use of Epo drugs after various studies showed that overuse increased the risk of heart attacks and other cardiovascular problems.

Patent expirations

Amgen's principal European patent relating to Epoetin alfa expired in December 2004.

Amgen divided its invention into several patents, some of which were not granted until years later, giving Amgen longer protection than the 20 years envisioned in patent law.

Amgen's patents for epoetin alfa (a human erythropoietin produced in cell culture using recombinant DNA technology) will expire as follows:

In the U.S.: Process of making erythropoietin 8/15/2012; Product claims to erythropoietin 8/20/2013; Pharmaceutical compositions of erythropoietin 8/20/2013.

Amgen's patents for darbepoetin alfa (a synthetic form of erythropoietin) expire as follows:

U.S.: Glycosylation analogs of erythropoietin proteins 5/15/2024.

Europe: Glycosylation analogs of erythropoietin proteins 8/16/2014, which may be extended in some countries in Europe.

As you can see, the patents expire slowly and Amgen plans on fighting every step of the way. Yet the loss of the monopoly is inevitable.

Is Amgen's dividend safe?

Amgen, the largest biotechnology company in the world, in a 2011 policy statement clearly noted:

We expect to grow the dividend meaningfully over time. Through 2015, we expect to return on average, around 60% of net income to shareholders through dividends and share repurchases.

Is Amgen's dividend safe? The answer is yes, for now, but the storm clouds are gathering.

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.